What current yield measures, and what it deliberately ignores
Current yield answers one question: for every dollar I put into this bond today, how many cents of coupon income do I receive each year? Divide the annual coupon by the market price and you have it. A $1,000 bond with a 5% coupon pays $50 a year; buy it for $950 and your income return is 50 ÷ 950 = 5.263%.
The measure is popular because it is honest about the one thing it covers and requires nothing you do not already have on the trade ticket. It needs no maturity date, no reinvestment assumption, and no iterative solver. That makes it the right number when income is the point — a retiree sizing a bond ladder against a monthly spending need cares what arrives in the account, not what the internal rate of return will be in 2039.
What it ignores is the capital side. A bond bought at $950 repays $1,000 at maturity, and that $50 gain is part of your return; current yield does not see it. A bond bought at $1,100 repays $1,000, and that $100 loss is equally real; current yield does not see that either. Nor does it account for the timing of coupons, for reinvestment, for call provisions, or for default risk. Every one of those is inside yield to maturity, which is why professionals quote YTM and use current yield as a cross-check.
The formula, term by term
Current yield = (coupon rate × face value) ÷ market price. Three terms, each with one trap.
Face value is the redemption amount, not what you paid. It is fixed for the life of the bond and it is the base the coupon rate is applied to. US corporate and municipal bonds are almost always issued in $1,000 denominations; Treasuries trade in $100 par blocks. If you enter the price you paid where face value belongs, you will get the coupon rate back instead of the current yield.
Coupon rate is the stated annual rate on the bond certificate. It never changes for a fixed-rate bond, whatever happens to the price. It is not the yield, and the distinction is the entire point of this calculation: the coupon rate is fixed at issue, and the yield moves every day the price moves.
Market price is the clean price — the quoted price, excluding accrued interest. Bond prices are quoted as a percentage of par, so a quote of 95.25 on a $1,000 bond means $952.50. If you buy between coupon dates you also pay the seller the interest that has accrued since the last payment, and that raises your actual cash outlay. This calculator shows both: the current yield on the quoted clean price, which is the number everyone means by current yield, and the yield on the full invoice price for when you want to know what your cash actually bought.
Notice what is not in the formula. The payment frequency does not appear, because it splits the same annual coupon into different-sized instalments. Time to maturity does not appear, which is exactly why current yield says nothing about the return of principal.
Worked example: ten bonds at 95, 5% coupon
You are buying ten $1,000 face-value corporate bonds with a 5% semi-annual coupon, quoted at 95, and settlement falls 90 days after the last coupon date.
- Annual coupon income per bond. 5% × $1,000 = $50.00. This is fixed for the life of the bond.
- Income per payment. $50 ÷ 2 = $25.00 every six months.
- Price in dollars. A quote of 95 is 95% of par, so $1,000 × 0.95 = $950.00 per bond.
- Current yield. 50 ÷ 950 = 0.0526316, so 5.263%. The bond trades below par, so you buy the same $50 coupon for fewer dollars and the yield lands above the 5% coupon rate.
- Position income. $50 × 10 bonds = $500.00 a year, arriving as $250 twice a year.
- Accrued interest. On a 30/360 basis, 90 days into a 180-day period is exactly half: $25 × 90 ÷ 180 = $12.50 per bond, so your invoice is $962.50 per bond, or $9,625 for ten.
- Yield on invested cash. 50 ÷ 962.50 = 5.195%. Lower than the headline current yield, because the accrued interest you fronted is returned to you at the next coupon rather than earning anything.
Compare that with what a total-return measure would say. If the bond matures in eight years, you also collect $50 of price appreciation per bond as it pulls to par, which pushes the yield to maturity above the 5.263% current yield. Current yield captured the income and missed the capital gain entirely.
Reading the number: three orderings you should know
The relationship between coupon rate, current yield and yield to maturity is fixed by arithmetic, and knowing it lets you sanity-check any bond quote in seconds.
At a discount (price below par): coupon rate < current yield < yield to maturity. You buy a fixed coupon cheaply, which lifts the income yield, and you also collect the pull to par, which lifts the total-return yield further.
At par: coupon rate = current yield = yield to maturity. All three collapse to the same number, which is the case worth memorising as an anchor.
At a premium (price above par): coupon rate > current yield > yield to maturity. You pay extra for the fixed coupon, and you also take a capital loss as the price grinds down to par by maturity.
The practical use of these orderings is to spot a number that cannot be right. If someone quotes you a premium bond with a yield to maturity above its coupon rate, one of the three inputs is wrong. And the gap between current yield and yield to maturity tells you how much of the return depends on the bond surviving to maturity — wide gaps mean a large share of your return is a capital event years away, not income arriving now.
One warning about high current yields. Price is the denominator, so a distressed bond trading at 40 cents on the dollar shows a spectacular current yield precisely because the market doubts the coupons will keep arriving. Current yield is undefined on risk. Treat an unusually high figure as a question about credit rather than an answer about income.
Current yield of a 5% coupon $1,000 bond at different prices
| Price | Quote (% of par) | Current yield | Versus 5% coupon |
|---|---|---|---|
| $800 | 80 | 6.250% | Discount |
| $850 | 85 | 5.882% | Discount |
| $900 | 90 | 5.556% | Discount |
| $950 | 95 | 5.263% | Discount |
| $1,000 | 100 | 5.000% | At par |
| $1,050 | 105 | 4.762% | Premium |
| $1,100 | 110 | 4.545% | Premium |
| $1,150 | 115 | 4.348% | Premium |
| $1,200 | 120 | 4.167% | Premium |
Each cell is $50 divided by the price in the first column. A $200 move down from par adds 1.250 points of yield; the same $200 move up removes only 0.833.
Mistakes that produce a wrong current yield
- Dividing the coupon by face value instead of price. That gives back the coupon rate, which is what you already knew. The price is the whole point of the calculation.
- Entering a quote as a dollar price. A bond quoted at 98.5 costs $985 on a $1,000 par, not $98.50. This error inflates the yield by a factor of ten.
- Using the dirty price for the headline figure. Convention divides by the clean price. Accrued interest is money you get back at the next coupon, not a cost of the income stream.
- Treating current yield as total return. It excludes the pull to par entirely, so it understates the return on a discount bond and overstates it on a premium bond held to maturity.
- Comparing current yield with a bond fund's SEC yield. The SEC 30-day yield is a standardised yield-to-maturity-style calculation net of expenses; a fund's distribution yield is closer to current yield. The two are not interchangeable.
- Reading a very high current yield as an opportunity. A collapsed price is the market's judgement on the coupons continuing. Check the credit before the arithmetic.
- Applying it to a floating-rate note. The coupon resets, so today's current yield describes only the current period and tells you nothing about the next one.
Current yield on a callable bond
If the bond can be called, the price will often sit above par and the issuer has the option to redeem it at the call price on a call date. Current yield does not see the call at all, so a callable premium bond can show a comfortable income yield while the yield to worst — the lowest of yield to maturity and the yields to each call date — is materially lower. Always ask for yield to worst on a callable bond and use current yield only to size the income stream while the bond remains outstanding.
Where current yield fits in a bond decision
Use current yield first and last, and something else in between. First, because it tells you in one division whether the income covers the need you are buying the bond for. Last, because after you have chosen a bond on total-return and credit grounds, the current yield is what actually shows up in the account each quarter.
In between, three other calculations do the real work. Bond price discounts every coupon and the principal back at a market rate, and shows why prices move inversely to rates. Yield to maturity solves the same equation for the rate instead of the price, giving the total-return measure that current yield omits. The premium and discount amortisation calculator shows how the book value of a bond bought away from par moves toward par over its life — which is also how the tax treatment works.
If the bond is a municipal issue, the current yield is tax-free income, and comparing it with a taxable bond's yield requires converting it first: our tax-equivalent yield calculator does that at your marginal rates. And if you are building a ladder rather than buying a single bond, run the current yield on each rung; the weighted average across the ladder is the income yield of the portfolio.
Key terms
- Clean price
- The quoted price of a bond, excluding accrued interest. This is the denominator of the conventional current yield.
- Dirty price (invoice price)
- Clean price plus accrued interest — the cash you actually pay at settlement.
- Accrued interest
- Interest earned by the seller since the last coupon date, which the buyer reimburses at settlement and recovers at the next coupon.
- Running yield
- The British term for current yield. Identical calculation.
- Yield to worst
- The lowest of yield to maturity and the yields calculated to every possible call date — the conservative quote on a callable bond.