{"id":27323,"date":"2024-01-18T14:25:37","date_gmt":"2024-01-18T19:25:37","guid":{"rendered":"https:\/\/breakingintowallstreet.com\/?post_type=biws_kb&#038;p=27323"},"modified":"2024-12-16T23:40:25","modified_gmt":"2024-12-17T04:40:25","slug":"current-yield","status":"publish","type":"biws_kb","link":"https:\/\/breakingintowallstreet.com\/kb\/debt-equity\/current-yield\/","title":{"rendered":"Current Yield on a Bond: Definition, Examples, and Key Relationships"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_81 counter-flat ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Current Yield on a Bond: Definition, Examples, and Key Relationships<\/p>\n<span class=\"ez-toc-title-toggle\"><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/breakingintowallstreet.com\/kb\/debt-equity\/current-yield\/#Current_Yield_Definition\">Current Yield Definition<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/breakingintowallstreet.com\/kb\/debt-equity\/current-yield\/#Current_Yield_Formula_How_to_Calculate_the_Current_Yield\">Current Yield Formula: How to Calculate the Current Yield<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/breakingintowallstreet.com\/kb\/debt-equity\/current-yield\/#Current_Yield_Scenario_1_Discount_Bond_Market_Price_%3C_Par_Value\">Current Yield Scenario #1: Discount Bond (Market Price &lt; Par Value)<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/breakingintowallstreet.com\/kb\/debt-equity\/current-yield\/#Current_Yield_Scenario_2_Premium_Bond_Market_Price_%3E_Par_Value\">Current Yield Scenario #2: Premium Bond (Market Price &gt; Par Value)<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/breakingintowallstreet.com\/kb\/debt-equity\/current-yield\/#Current_Yield_Scenario_3_Bond_at_Par_Market_Price_Par_Value\">Current Yield Scenario #3: Bond at Par (Market Price = Par Value)<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/breakingintowallstreet.com\/kb\/debt-equity\/current-yield\/#Current_Yield_vs_Yield_to_Maturity_vs_Yield_to_Call_vs_Yield_to_Worst\">Current Yield vs. Yield to Maturity vs. Yield to Call vs. Yield to Worst<\/a><\/li><\/ul><\/nav><\/div>\n\n<h2><span class=\"ez-toc-section\" id=\"Current_Yield_Definition\"><\/span>Current Yield Definition<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<blockquote><p>The Current Yield on a bond tells you <span>the percentage return an investor can expect to earn\u00a0<\/span><em>over the next year<\/em><span>\u00a0if they purchase the bond at its current market price.<\/span><\/p><\/blockquote>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-27331 size-full\" title=\"Current Yield Formula\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/01\/18140227\/01-Current-Yield-Formula.jpg\" alt=\"Current Yield Formula\" width=\"1046\" height=\"134\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/01\/18140227\/01-Current-Yield-Formula.jpg 1046w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/01\/18140227\/01-Current-Yield-Formula-300x38.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/01\/18140227\/01-Current-Yield-Formula-1024x131.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/01\/18140227\/01-Current-Yield-Formula-768x98.jpg 768w\" sizes=\"(max-width: 1046px) 100vw, 1046px\" \/><\/p>\n<p>A \u201cbond\u201d is a loan that a company takes out to borrow money; it must be repaid in full in the future, and the company must pay\u00a0<strong>interest<\/strong><span>\u00a0<\/span>on it each year.<\/p>\n<p>From the company\u2019s perspective, the <a href=\"https:\/\/breakingintowallstreet.com\/kb\/debt-equity\/bond-yield\/\" target=\"_blank\" rel=\"noopener\">bond yield<\/a> represents their\u00a0<strong>borrowing costs<\/strong>; from an investor\u2019s perspective, the bond yield represents the\u00a0<strong>potential returns<\/strong><span>\u00a0<\/span>and the risks associated with the company\u2019s issuance.<\/p>\n<div class='code-block code-block-2' style='margin: 8px 0; clear: both;'>\n<div class=\"kb-adinsert-modal\">\n    <div class=\"kb-adinsert-top\">\n      <div class=\"media\">\n          <img decoding=\"async\" class=\"alignnone size-full wp-image-28448\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/24164120\/adv-fm-tile.png\" alt=\"PowerPoint Pro\" width=\"128\" height=\"128\" \/>\n      <\/div>\n      <div class=\"content\">\n          <h3>Master Financial Modeling for Investment Banking With <strong>BIWS Core Financial Modeling<\/strong><\/h3>\n      <\/div>\n    <\/div>\n    \n    <div class=\"full_text\">\n    \t<ul>\n        \t<li>\n            \t<h4>Become a financial modeling pro<\/h4>\n              <p>158 videos, detailed written guides, Excel files, quizzes, and more<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Complete 10+ detailed global case studies<\/h4>\n            <p>These include both the theory and the practical applications<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Prepare for your internship or full-time job<\/h4>\n            <p>Gain the skills you need to \u201chit the ground running\u201d on Day 1\n\n<\/p>\n\t\t\t  <\/li>\n      <\/ul>\n        \n      <a class=\"cta-link orange-button-medium\" href=\"https:\/\/breakingintowallstreet.com\/core-financial-modeling\/\" target=\"_blank\">Full Details<\/a>\n      \n      <a class=\"cta-link orange-button-medium bg-blue\" href=\"https:\/\/biws-support.s3.us-east-1.amazonaws.com\/Course-Outlines\/Core-Financial-Modeling-Course-Outline.pdf\" target=\"_blank\" rel=\"noopener\">Short Outline<\/a>\n    <\/div>\n<\/div><\/div>\n\n<p>However, there are different types of &#8220;bond yields,&#8221; and this article addresses the <strong>Current Yield<\/strong>, specifically.<\/p>\n<p>All bonds have <strong>coupon rates<\/strong> attached, which indicate the amount of interest the company must pay each year.<\/p>\n<p>For example, a $1,000 bond with an 8% coupon rate means the company must pay 8% * $1,000 = $80 in interest per year.<\/p>\n<p><strong>The Current Yield is different from the coupon rate because it factors in the <em>market price of the bond &#8211; <\/em>so, the investors could earn a return over the next year that&#8217;s higher or lower than the stated coupon rate.<\/strong><\/p>\n<p>For example, let&#8217;s say this same $1,000 bond trades at a 10% discount, so its market price is $900.<\/p>\n<p>The annual coupon (interest payment) is still $1,000 * 8% = $80.<\/p>\n<p>However, the\u00a0<strong>Current Yield<\/strong> is $80 \/ $900 = 8.9%.<\/p>\n<p>Investors can buy the bond\u00a0<strong>at a discount<\/strong>, which means that their return over the next year will be higher than the stated 8% coupon rate.<\/p>\n<p>Bonds usually trade at discounts or premiums due to changes in interest rates since they were issued, but factors such as the company&#8217;s credit quality can also factor in.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Current_Yield_Formula_How_to_Calculate_the_Current_Yield\"><\/span><strong>Current Yield Formula: How to Calculate the Current Yield<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>The formula for the Current Yield is:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-27331 size-full\" title=\"Current Yield Formula\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/01\/18140227\/01-Current-Yield-Formula.jpg\" alt=\"Current Yield Formula\" width=\"1046\" height=\"134\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/01\/18140227\/01-Current-Yield-Formula.jpg 1046w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/01\/18140227\/01-Current-Yield-Formula-300x38.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/01\/18140227\/01-Current-Yield-Formula-1024x131.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/01\/18140227\/01-Current-Yield-Formula-768x98.jpg 768w\" sizes=\"(max-width: 1046px) 100vw, 1046px\" \/><\/p>\n<p>If you do not know the bond&#8217;s current market price, you could estimate it with the PRICE function in Excel, but this requires inputs for variables such as the <a href=\"https:\/\/breakingintowallstreet.com\/kb\/finance\/discount-rate\/\" target=\"_blank\" rel=\"noopener\">Discount Rate<\/a> (i.e., the prevailing yields on similar bonds in the market).<\/p>\n<p>And if you cannot find this one bond&#8217;s specific price, you probably won&#8217;t be able to get information on the yields for many other bonds in the market.<\/p>\n<p>So, in reality, you normally have to look in a company&#8217;s filings and hope they disclose the current price (or use a paid service such as Bloomberg, which tracks bond prices):<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-27334 size-full\" title=\"Fair Value of Steel Dynamics' Debt\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/01\/18140809\/02-STLD-Debt-Fair-Value.jpg\" alt=\"Fair Value of Steel Dynamics' Debt\" width=\"1132\" height=\"130\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/01\/18140809\/02-STLD-Debt-Fair-Value.jpg 1132w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/01\/18140809\/02-STLD-Debt-Fair-Value-300x34.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/01\/18140809\/02-STLD-Debt-Fair-Value-1024x118.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/01\/18140809\/02-STLD-Debt-Fair-Value-768x88.jpg 768w\" sizes=\"(max-width: 1132px) 100vw, 1132px\" \/><\/p>\n<p>This Current Yield calculation helps investors identify bonds that generate the highest returns, which can be helpful for short-term investments.<\/p>\n<p>However, it is also a double-edged sword because <strong>bonds with higher returns also have greater risk<\/strong> &#8211; meaning there is a higher chance of losing money or selling the bond at a loss in the future.<\/p>\n<h3><strong>Rules of Thumb for the Current Yield<\/strong><\/h3>\n<p>Since the Current Yield is affected mostly by the bond&#8217;s market price and coupon rate, we can establish several key relationships based on these drivers.<\/p>\n<p>&#8220;YTM&#8221; below is the &#8220;<a href=\"https:\/\/breakingintowallstreet.com\/kb\/debt-equity\/yield-to-maturity\/\" target=\"_blank\" rel=\"noopener\">Yield to Maturity<\/a>,&#8221; which represents the annualized return if you hold the bond until it matures and the company repays it in full:<\/p>\n<p><strong>1) Discount Bond (Market Price &lt; Par Value):<\/strong> YTM &gt; Current Yield &gt; Coupon Rate<\/p>\n<p><strong>2) Premium Bond (Market Price &gt; Par Value):<\/strong> Coupon Rate &gt; Current Yield &gt; YTM<\/p>\n<p><strong>3) Bond at Par (Market Price = Par Value):<\/strong> YTM = Current Yield = Coupon Rate<\/p>\n<p>In the sections below, we&#8217;ll look at each scenario in detail and show the full numbers.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Current_Yield_Scenario_1_Discount_Bond_Market_Price_%3C_Par_Value\"><\/span><strong>Current Yield Scenario #1: <\/strong><strong>Discount Bond (Market Price &lt; Par Value)<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>The assumptions here are as follows:<\/p>\n<p><strong>Bond Par Value:<\/strong> $1,000 (The company issued it at this price)<\/p>\n<p><strong>Coupon Rate:<\/strong> 6%<\/p>\n<p><strong>Current Market Price:<\/strong> $950<\/p>\n<p><strong>Current Yield<\/strong> = (6.0% * $1,000) \/ $950 = 6.3%<\/p>\n<p>Since the bond trades at a <strong>discount<\/strong> to par value (market price &lt; par value), its Current Yield of 6.3% exceeds its coupon rate of 6%:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-27335 size-full\" title=\"Current Yield for a Discount Bond\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/01\/18141625\/03-Discount-Bond-Current-Yield.jpg\" alt=\"Current Yield for a Discount Bond\" width=\"1458\" height=\"670\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/01\/18141625\/03-Discount-Bond-Current-Yield.jpg 1458w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/01\/18141625\/03-Discount-Bond-Current-Yield-300x138.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/01\/18141625\/03-Discount-Bond-Current-Yield-1024x471.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/01\/18141625\/03-Discount-Bond-Current-Yield-768x353.jpg 768w\" sizes=\"(max-width: 1458px) 100vw, 1458px\" \/><\/p>\n<p>&nbsp;<\/p>\n<p>Most likely, this bond trades at a\u00a0<strong>discount<\/strong> because overall interest rates have risen since it was issued.<\/p>\n<p>Therefore, its 6% coupon rate looks less appealing than it when it was first issued, so its price has fallen.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Current_Yield_Scenario_2_Premium_Bond_Market_Price_%3E_Par_Value\"><\/span><strong>Current Yield Scenario #2: Premium Bond (Market Price &gt; Par Value)<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Conversely, if the bond trades at a <strong>premium<\/strong> to par value (market price &gt; par value), its Current Yield is less than its coupon rate.<\/p>\n<p>Here\u2019s an example:<\/p>\n<p><strong>Bond Par Value:<\/strong> $1,000 (Company issued it at this price)<\/p>\n<p><strong>Coupon Rate: <\/strong>6%<\/p>\n<p><strong>Current Market Price:<\/strong> $1,100<\/p>\n<p><strong>Current Yield<\/strong> = (6.0% * $1,000) \/ $1,100 = 5.5%<\/p>\n<p>Since the bond trades at a <strong>premium<\/strong> to par value, its Current Yield of 5.5% is less than its coupon rate of 6%:<\/p>\n<p><img decoding=\"async\" class=\"alignnone size-full wp-image-27336\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/01\/18142144\/04-Premium-Bond-Current-Yield.jpg\" alt=\"Current Yield for a Premium Bond\" width=\"1464\" height=\"676\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/01\/18142144\/04-Premium-Bond-Current-Yield.jpg 1464w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/01\/18142144\/04-Premium-Bond-Current-Yield-300x139.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/01\/18142144\/04-Premium-Bond-Current-Yield-1024x473.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/01\/18142144\/04-Premium-Bond-Current-Yield-768x355.jpg 768w\" sizes=\"(max-width: 1464px) 100vw, 1464px\" \/><\/p>\n<p>This bond likely trades at\u00a0<strong>premium<\/strong> because overall interest rates have decreased since the initial issuance.<\/p>\n<p>In other words, its 6% coupon rate now looks\u00a0<em>better<\/em> than what investors could get from new bond issuances in this market, so its price has increased.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Current_Yield_Scenario_3_Bond_at_Par_Market_Price_Par_Value\"><\/span><strong>Current Yield Scenario #3: Bond at Par (Market Price = Par Value)<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>This example uses the same parameters, but assumes the bond&#8217;s market price equals its par value:<\/p>\n<p><strong>Bond Par Value:<\/strong> $1,000 (Company issued it at this price)<\/p>\n<p><strong>Coupon Rate:<\/strong> 6%<\/p>\n<p><strong>Current Market Price:<\/strong> $1,000<\/p>\n<p><strong>Current Yield<\/strong> = (6.0% * $1,000) \/ $1,000 = 6.0%<\/p>\n<p>Since the bond price is equal to its par value, its Current Yield of 6.0% is the same as its coupon rate:<\/p>\n<p><img decoding=\"async\" class=\"alignnone size-full wp-image-27337\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/01\/18142321\/05-Par-Bond-Current-Yield.jpg\" alt=\"Current Yield for a Par Value Bond\" width=\"1458\" height=\"676\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/01\/18142321\/05-Par-Bond-Current-Yield.jpg 1458w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/01\/18142321\/05-Par-Bond-Current-Yield-300x139.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/01\/18142321\/05-Par-Bond-Current-Yield-1024x475.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/01\/18142321\/05-Par-Bond-Current-Yield-768x356.jpg 768w\" sizes=\"(max-width: 1458px) 100vw, 1458px\" \/><\/p>\n<p>It&#8217;s fairly rare for a bond&#8217;s market price to equal its par value\u00a0<em>exactly<\/em>, but it does happen sometimes.<\/p>\n<p>This scenario is the most common with investment-grade or &#8220;blue chip&#8221; companies that have very low credit risk and that have recently issued bonds in an environment in which interest rates have not changed significantly.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Current_Yield_vs_Yield_to_Maturity_vs_Yield_to_Call_vs_Yield_to_Worst\"><\/span><strong>Current Yield vs. Yield to Maturity vs. Yield to Call vs. Yield to Worst <\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>These yield metrics all measure the <strong>returns<\/strong> an investor can expect to receive on a bond, but they do it in different ways.<\/p>\n<p><strong>&#8211;<a href=\"https:\/\/breakingintowallstreet.com\/kb\/debt-equity\/current-yield\/\" target=\"_blank\" rel=\"noopener\">Current Yield<\/a><\/strong>: This tells you the percentage investors would earn on a bond if they bought it today and <strong>held it for a year<\/strong>, factoring in the market price and the coupon rate on the bond.<\/p>\n<p><strong>&#8211;<a href=\"https:\/\/breakingintowallstreet.com\/kb\/debt-equity\/yield-to-maturity\/\" target=\"_blank\" rel=\"noopener\">Yield to Maturity<\/a><\/strong>: This gives the annualized return investors earn if they buy a bond at its current market price and <strong>hold it until maturity<\/strong>, assuming the company makes all the required payments and the investor reinvests the interest payments at the same rate as the overall return.<\/p>\n<p><strong>&#8211;<a href=\"https:\/\/breakingintowallstreet.com\/kb\/debt-equity\/yield-to-call\/\" target=\"_blank\" rel=\"noopener\">Yield to Call<\/a><\/strong>: This is similar to the YTM, but investors hold the bond only until <strong>an earlier call date<\/strong>, not the maturity date, and also receive some type of penalty fee paid by the company in exchange for this early repayment.<\/p>\n<p><strong>&#8211;<a href=\"https:\/\/breakingintowallstreet.com\/kb\/debt-equity\/yield-to-worst\/\" target=\"_blank\" rel=\"noopener\">Yield to Worst<\/a><\/strong>: This is the lowest annualized return an investor might receive from buying and holding a bond until <em>either<\/em> early repayment <em>or<\/em> maturity, i.e., it is the <strong>minimum<\/strong> of all the YTCs and the YTM.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>The Current Yield on a bond tells you the percentage return an investor can expect to earn\u00a0over the next year\u00a0if they purchase the bond at its current market price.<\/p>\n","protected":false},"featured_media":0,"template":"","class_list":["post-27323","biws_kb","type-biws_kb","status-publish","hentry","kb_category-debt-equity"],"acf":[],"_links":{"self":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb\/27323","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb"}],"about":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/types\/biws_kb"}],"wp:attachment":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/media?parent=27323"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}