If a bond is trading at its face value (FV) – i.e.If a bond is trading below its face value (FV), the current yield is higherthan the coupon rate.Since the price of a bond adjusts based on the prevailing macro conditions and news surrounding the underlying issuer, bonds can be purchased at discounts or premiums relative to par. The current yield is most often relevant only if the market price deviates from its par value. In practice, the calculation of the metric is simple and convenient, yet its utility tends to be limited in scope. The difference between the current yield and coupon rate of a bond stems from the pricing of the bond diverging from its par value. Current Yield = $80 Annual Coupon ÷ $970 Bond Price = 8.25%.The formula for calculating the current yield on a bond is as follows.Ĭurrent Yield (%) = Annual Coupon ÷ Bond Priceįor instance, if a corporate bond with a $1,000 face value ( FV) and an $80 annual coupon payment is trading at $970, then the implied yield is 8.25%. Step 3 → Finally, the current yield formula is equal to the annual coupon payment divided by the bond’s current market price, expressed as a percentage.Step 2 → Next, the annual coupon must be calculated, which is a function of the bond’s coupon rate, par value, and payment frequency, if applicable (i.e.Step 1 → First, the current market price of the bond can be readily observed – in which the bond can either trade at a discount, at par, or at a premium to par.The calculation of the current yield is a straightforward 3-step process: The current yield is equal to the annual coupon on a bond, depicted as a percentage of the market price – which could be higher or lower than its par value.Ĭonceptually, the current yield represents the bondholder’s rate of return if the investment is held for the next year. The Current Yield measures the expected annual return of a bond and is calculated by dividing the annual coupon by the current market price.
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