Table of contentsWhat is the bond current yield? Understanding the current yield definitionBond current yield calculator: How to calculate current yieldWhat is the difference between bond current yield and yield to maturity (YTM)?FAQs
With this bond current yield calculator, we aim to help you to calculate the bond current yield of a bond. The bond current yield represents the annual return you can get from investing in the bond based on its current price.
We have written this article to help you understand what a bond current yield is and how to apply the bond current yield formula. We will also demonstrate some examples to help you understand the concept.
What is the bond current yield? Understanding the current yield definition
A bond is an investment instrument that allows you to earn returns by lending your money to corporations and governments. A bond investment has two main components: the coupon payments and the principal. The bond current yield allows you to assess the former.
The bond current yield tells you how much the annual coupon is worth compared to the bond price. It may be helpful to see the coupon payments from a bond investment as a dividend from a stock investment. Hence, the bond current yield is similar to the dividend yield of a stock. Both of the metrics help you to analyze the annual return component of the investment.
However, compared to dividend yield, the current yield is relatively safer and more conservative as the coupon payments are fixed until the bond is matured. In contrast, dividends can be changed or even canceled. In general, the higher the bond current yield, the safer the bond investment.
After understanding the current yield definition, let's look at some examples to understand how to calculate the current yield.
Bond current yield calculator: How to calculate current yield
Without further ado, let’s look at the bond current yield formula. To understand how to calculate current yield, let's take Bond A issued by Company Alpha as an example. It has the following data:
- Face value:
- Coupon payment per period:
- Coupon frequency:
- Coupon rate:
- Bond price:
The calculation of current bond yield requires only 3 steps:
Calculate annual coupon
annual couponis the amount of coupon payments you will receive in a year. You can calculate it simply by multiplying the
coupon per periodby the
coupon frequency, as shown in the formula below:
annual coupon = coupon per period × coupon frequency
As Bond A is a semi-annual coupon bond, its
2. Hence, the annual coupon for Bond A is
2 × $25 = $50.
You can also find it by multiplying the
face valueof the bond by the
coupon rate, as shown in the equation below:
annual coupon = face value × coupon rate
Using this equation, the
annual couponof Bond A is
$1,000 × 5% = $50.
So, if you want to know how to find the current yield of a bond, both above methods produce the same starting point.
Determine the bond price
bond priceis the market price of the bond. It will be the money you spend to acquire the bond.
You can easily get this information from your brokers or bankers. Of course, you can also calculate it using our bond price calculator.
Use the bond current yield formula
Last, but not least, we can find the final result using the bond current yield formula below:
bond current yield = annual coupon / bond price
For our example, the bond current yield of Bond A is
$50 / $900 = 5.56%.
Now you know how to find the current yield of a bond. Still, wouldn't it be quicker to use our bond current yield calculator?
What is the difference between bond current yield and yield to maturity (YTM)?
Even though you now know what a current bond yield is, you may have also heard about yield to maturity. Let's see what the differences between both terms are:
The current yield of a bond only represents the interest return component of the bond. This means it only considers the coupon payments and neglects the principal return component and the changes in bond prices due to market conditions.
On the other hand, the yield to maturity (YTM) represents the total return of the bond. The YTM is the total return that an investor will get if the bond is held to maturity, and the investor can reinvest all of the coupon payments at the YTM.
All in all, if you are looking to see how much return you will get per year in the form of coupon payments, bond current yield is a good metric to use (and you can find it with our bond current yield calculator). However, if you are looking to assess the overall return of your bond investment, YTM is a better measure.
How do I find the current yield of a bond?
The current bond yield calculation requires three steps:
Calculate the annual coupon. It depends on the face value, coupon rate, and coupon frequency.
Determine bond price. It is the market price of the bond you buy.
Apply the bond current yield formula:
bond current yield = annual coupon / bond price
Is the bond current yield the same as bond yield?
No, the bond current yield is not the same as the bond yield. While bond yield represents the total return on a bond, the bond current yield calculates the return only based on the annual coupon.
What is the current yield of a bond?
The current yield of a bond is defined as the annual coupon of the bond divided by the bond price. It represents the return of the bond in terms of its annual coupon.
What is coupon rate?
The coupon rate represents how much the coupon payments is when compared to the face value of the bond. Generally, the higher the coupon rate of a bond, the safer the bond investment is as the coupon payments are fixed until the maturity of the bond.
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