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Section 4.4 Current Yield

The current yield CY is the return (as a percentage) of the annual coupon payment. This yield determines what percentage of the actual dollar coupon payment is of the price the investor pays for the bond.

\begin{equation*} CY = \$ 100 \cdot \frac{\text{Annual Interest Paid}}{\text{Market Price}} \end{equation*}
Example 4.4.1.

Suppose you purchase a bond with par value \(\$ 5000 \) for \(\$ 4950 \) with a coupon rate of 4%. Then, it's current yield:

\begin{equation*} CY = \$ 100 \cdot \frac{5000 \cdot 0.04}{4950} = 4.0404 \end{equation*}

The computation above does not include any possible gains or losses if the bond were bought at a discount or premium. Since the comparison of the bond price to its par value is a factor that affects the actual current yield, unless the purchaser pays par value for the bond then the above formula would give a slightly inaccurate picture. To correct this, investors can modify the current yield formula by adding the result of the current yield to the gain or loss the price gives the investor: [(Par Value – Bond Price)/Years to Maturity]. The modified current yield formula then takes into account the discount or premium at which the investor bought the bond:

\begin{equation*} CY = \$ 100 \cdot \frac{\text{Annual Coupon}}{\text{Market Price}} + \frac{\text{Maturity Value - Market Price}}{\text{Years Till Maturity}} \end{equation*}
Example 4.4.2.

Suppose our bond above matures in 60 months and has a coupon payment of \(\$ 10 \text{.}\) Then

\begin{equation*} CY = \$ 10 \cdot \frac{10}{4950} + \frac{5000-4950}{5} = 10.2020 \end{equation*}

The adjusted current yield of 10.20% is higher than the current yield of 4.04% because the bond's discounted price (4950 instead of 5000) gives the investor more of a gain on the investment