Current Yield
Current Yield
A bond yield calculation measuring annual interest income as a percentage of the current market price. Current yield equals annual interest payment divided by current market price. It adjusts the coupon rate based on whether the bond trades at a premium or discount, but does not account for capital gains or losses realized at maturity (unlike yield to maturity). Current yield changes daily as bond prices fluctuate with market conditions.
An investor owns a corporate bond with a $1,000 par value and 6% coupon ($60 annual interest). If the bond trades at $950 (discount), current yield is $60 ÷ $950 = 6.32%, higher than the 6% coupon rate. If the same bond trades at $1,050 (premium), current yield is $60 ÷ $1,050 = 5.71%, lower than the 6% coupon rate. The $60 annual payment never changes, but current yield adjusts as price fluctuates.
Students often confuse current yield with coupon rate (which is fixed at issuance) or yield to maturity (which includes capital gains/losses). They forget that current yield only measures annual income divided by current price, ignoring what happens at maturity. Many miss that for premium bonds, current yield falls between coupon rate (highest) and YTM (lowest), while for discount bonds, current yield falls between coupon rate (lowest) and YTM (highest).
How This Is Tested
- Calculating current yield from annual interest payment and market price
- Comparing current yield to coupon rate for premium and discount bonds
- Understanding the yield hierarchy: Coupon vs Current Yield vs YTM for bonds at different prices
- Determining how changes in market price affect current yield (inverse relationship)
- Identifying which yield measure to use for specific investment scenarios
Regulatory Limits
| Description | Limit | Notes |
|---|---|---|
| Current Yield formula | Annual Interest ÷ Current Market Price | Expressed as a percentage |
| Premium bond yield relationship | Coupon Rate > Current Yield > YTM | Premium bonds (price > par) have current yield between coupon and YTM |
| Discount bond yield relationship | YTM > Current Yield > Coupon Rate | Discount bonds (price < par) have current yield between YTM and coupon |
| Par bond yield relationship | YTM = Current Yield = Coupon Rate | When a bond trades at exactly par ($1,000), all three yields are identical |
Example Exam Questions
Test your understanding with these practice questions. Select an answer to see the explanation.
Marcus, a bond trader, purchased a 10-year corporate bond at par ($1,000) with a 5% coupon six months ago. Interest rates have since risen, and the bond now trades at $920. His colleague asks what his current yield is on this position. Which statement is most accurate?
B is correct. Current yield = Annual Interest ÷ Current Market Price = $50 ÷ $920 = 5.43%. When a bond price falls below par, current yield rises above the coupon rate. Even though Marcus purchased at par, current yield is calculated based on today's market price ($920), not his original purchase price.
A confuses current yield with coupon rate; while the coupon rate (5%) is fixed, current yield changes as market price changes. C incorrectly assumes current yield moves in the same direction as price; they have an inverse relationship (price down = yield up). D is incorrect because current yield is a simple calculation requiring only annual interest and current price, not YTM.
The Series 65 exam frequently tests understanding that current yield changes as bond prices fluctuate, unlike the fixed coupon rate. Understanding the inverse relationship between price and current yield is critical for bond market analysis and client communication. Scenario questions often present bonds that have changed in value and test whether you can calculate the new current yield.
Current yield is best defined as which of the following?
B is correct. Current yield is calculated by dividing the annual interest payment by the current market price of the bond, expressed as a percentage. This simple formula adjusts the bond's yield based on its current trading price.
A describes the coupon rate (nominal yield), not current yield. The coupon rate is fixed at issuance and never changes. C describes yield to maturity (YTM), which incorporates capital gains or losses at maturity in addition to interest income. D describes tax-equivalent yield, which adjusts municipal bond yields for tax benefits.
The Series 65 exam tests your ability to distinguish between different yield measures. Current yield is one of the most commonly tested calculations because it's straightforward yet frequently confused with coupon rate or YTM. Understanding the precise definition helps you select appropriate yield measures for different client scenarios and comparative analyses.
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A is correct. Current yield = Annual Interest ÷ Current Market Price. Calculate: Annual interest = $1,000 × 4% = $40. Current yield = $40 ÷ $1,080 = 0.0370 = 3.70%. Because the bond trades at a premium (above par), current yield is lower than the 4% coupon rate.
B (4.00%) is the coupon rate, not current yield. Current yield must be calculated using the current market price, not par value. C (4.32%) reverses the calculation ($1,080 ÷ $1,000 × 4%), which is mathematically incorrect. D (4.80%) incorrectly uses the formula ($1,080 - $1,000) ÷ $1,000 × 4%, confusing current yield with a capital gain calculation.
Current yield calculations appear frequently on the Series 65 exam, particularly for premium bonds where current yield falls between coupon rate and YTM. Understanding that premium bonds have current yields below their coupon rates is essential for bond comparison questions and explaining yields to clients. The exam tests whether you can accurately perform the calculation and understand the relationship.
All of the following statements about current yield are accurate EXCEPT
C is correct (the EXCEPT answer). Current yield does NOT account for capital gains or losses at maturity. It only measures annual interest income relative to current price. Yield to maturity (YTM) is the measure that incorporates capital appreciation (discount bonds) or depreciation (premium bonds) at maturity.
A is accurate: current yield changes daily as bond prices change, even though the coupon payment remains constant. B is accurate: this is the correct formula for current yield (Annual Interest ÷ Current Market Price). D is accurate: when a bond trades below par, dividing the fixed interest payment by a lower price produces a higher yield than the coupon rate.
The Series 65 exam tests your understanding of what current yield does and does not measure. A critical distinction is that current yield ignores what happens at maturity (the capital gain on discount bonds or capital loss on premium bonds), making it a simpler but less comprehensive measure than YTM. Questions frequently ask you to identify which yield measure is appropriate for specific analytical purposes.
A corporate bond with a $1,000 par value and 7% coupon is trading at $1,120. Which of the following statements about this bond's yields are accurate?
1. The coupon rate is 7.00%
2. The current yield is less than 7.00%
3. The yield to maturity is greater than the current yield
4. The current yield is 6.25%
C is correct. Statements 1, 2, and 4 are accurate.
Statement 1 is TRUE: The coupon rate is always stated as a percentage of par value. A 7% coupon on $1,000 par = $70 annual interest, which never changes.
Statement 2 is TRUE: For premium bonds (price > par), current yield is always less than the coupon rate because you're dividing the same $70 by a higher price ($1,120).
Statement 3 is FALSE: For premium bonds, the yield hierarchy is Coupon Rate > Current Yield > YTM. YTM is the LOWEST yield because it accounts for the capital loss when the bond matures at par ($1,000) after being purchased at $1,120. Current yield is higher than YTM, not lower.
Statement 4 is TRUE: Current yield = $70 ÷ $1,120 = 6.25%. This falls between the 7.00% coupon rate (highest) and YTM (which would be below 6.25%).
The Series 65 exam extensively tests the yield hierarchy for premium and discount bonds. Understanding that premium bonds have declining yields (Coupon > Current > YTM) while discount bonds have rising yields (YTM > Current > Coupon) is fundamental to fixed-income analysis. Questions often present a bond scenario and test whether you can identify the correct relationship between all three yield measures.
💡 Memory Aid
Think "Current = Right Now price": Current yield divides this year's interest check by today's market price. It's the snapshot yield (what you earn this year based on current price). Premium bonds = Price high, Current low. Discount bonds = Price low, Current high. Unlike YTM, current yield ignores the ending (no capital gains/losses at maturity).
Related Concepts
This term is part of this cluster:
More in Bond Mechanics
Where This Appears on the Exam
This term is tested in the following Series 65 exam topics: