The current yield is an investment's annual income (interest or dividends) divided by the current price of the security.
This measure examines the current price of a bond, rather than looking at its face value.
The current yield is not the actual return an investor receives if he holds a bond until maturity.
A bond's current yield is an investment's annual income includes:
which are then divided by the current price of the security.
If an investor buys a 6% coupon rate bond for a discount of $900, the investor earns annual interest income of ($1,000 X 6%), or $60.
The current yield is ($60) / ($900), or 6.67%. The $60 in annual interest is fixed, regardless of the price paid for the bond. On the other hand, if an investor purchases a bond at a premium of $1,100, the current yield is ($60) / ($1,100), or 5.45%.
The investor paid more for the premium bond that pays the same dollar amount of interest, therefore the current yield is lower.
Current yield can also be calculated for stocks by taking the dividends received for stock and dividing the amount by the stock’s current market price