Current Yield Formula and Bond Yield Hierarchy
Current yield equals a bond's annual interest divided by its current market price. A 6% bond with a $1,000 par value trading at $900 pays $60 a year, so its current yield is $60 ÷ $900, or about 6.67%. It ignores gains or losses at maturity.
The yield see-saw
For a discount bond, yields rank: nominal yield < current yield < yield to maturity < yield to call. For a premium bond the order reverses: yield to call < yield to maturity < current yield < nominal yield. Par bonds have equal yields.
Why current yield is limited
Current yield captures only the income component. It does not include the capital gain from buying below par or the capital loss from buying above par, which is why yield to maturity is the more complete measure.
Frequently asked questions
What is Current Yield?
Current yield equals a bond's annual interest divided by its current market price. A 6% bond with a $1,000 par value trading at $900 pays $60 a year, so its current yield is $60 ÷ $900, or about 6.67%. It ignores gains or losses at maturity.
How does Current Yield show up on the exam?
A bond bought at a discount always has a current yield higher than its nominal yield. Memorize the see-saw order once and apply it both ways.
Practice this concept
Sources
- FINRA SIE and Series 7 content outlines (debt securities)
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