Current Yield

While Yield to Maturity (YTM) looks at the entire life of a bond, Current Yield is much simpler.¹ It provides a snapshot of the annual income return you are getting from a bond based on its current market price, rather than its original face value.²

Think of it as the "Dividend Yield" for bonds.³ It tells you how much "rent" the bond is paying you right now relative to what it would cost you to buy it today.⁴

1. The Calculation

The formula for current yield is straightforward and requires no complex financial calculators:

Current Yield} =

• Annual Coupon Payment: The fixed dollar/rupee amount the bond pays each year (Coupon Rate x Par Value).
• Current Market Price: What the bond is actually trading for in the secondary market.⁷

Example: You buy a bond with a 6% coupon (₹60) at a discount price of ₹900.8

Current Yield = 60 / 900 = 6.67%

Because you paid less than par, your "actual" income return (6.67%) is higher than the stated coupon (6%).

2. The Relationship Rule

Current yield helps you immediately see if a bond is trading at a premium or a discount:¹⁰

• Discount Bond: Price < Par → Current Yield > Coupon Rate.
• Premium Bond: Price > Par → Current Yield < Coupon Rate.
• Par Bond: Price = Par → Current Yield = Coupon Rate.

3. Why Use Current Yield in 2026?

• Income Comparison: It allows you to compare the immediate cash flow of a bond with other income-generating assets like stocks or Real Estate Investment Trusts (REITs).¹⁷
• Short-Term Focus: If you only plan to hold a bond for a year or two, current yield is often more relevant than YTM because it focuses on the cash you'll actually touch in the near term.¹⁸
• Ease of Use: You can calculate it in seconds on the back of a napkin to see if a bond's price has fallen enough to make its income attractive.

4. The Critical Limitations

Current yield is a "quick and dirty" metric, and it has significant blind spots:¹⁹

• Ignores the "End Game": It doesn't account for the capital gain you get when a discount bond matures at par, or the capital loss you take when a premium bond matures at par.²⁰
• No Reinvestment: It assumes you spend your coupons rather than reinvesting them to earn interest-on-interest.
• Time Value of Money: It treats a dollar received today the same as a dollar received in 10 years.

Summary: Current Yield vs. YTM