Understanding Current Yield: A Simple Bond Investment Metric

Current yield is the income generated by a bond divided by the price of the bond. It is quoted in terms of a percentage yield. It is a simple calculation used as a primary benchmark to gauge the current year's yield of a single bond. This is different from the interest yielded at the origination of the bond because that uses the par value, which is $1,000 or 100. The current yield, by contrast, focuses on the current price of the bond, which most likely will not be equal to par value.

In addition, the current yield is different from the yield to maturity. Determining the yield to maturity involves a more elongated arithmetic used to generate a more accurate estimation of the average interest rate for the life of the bond. Unlike yield to maturity, the current yield does not involve a discount factor, which is why it is determined by a simpler calculation. This is also why it is more of a benchmark. The yield to maturity is more of an estimation because the discount factor is always changing and can be a range of figures as opposed to an absolute number. All in all, current yield comes in handy for quick comparisons.