How It Works
The formula for current yield is defined as follows:
CY = Annual interest payment / Current Bond Price
For example, let's assume a particular bond is trading at par, or 100 cents on the dollar, and that it pays a coupon rate of 3%. In this case, the bond's current yield will also be 3% (as shown below).
CY = 3 / 100 = 3.00%
However, let's now assume that the same bond is trading at a discount to its par value. For the sake of example, let's say investors can now purchase the bond for just 95 cents on the dollar. In this case, even though the bond will still be paying a 3% coupon, its current yield will actually be slightly higher (as shown below):
CY = 3 / 95 = 3.16%
As another example, let's say the bond is trading at a premium to its face value -- 110 cents on the dollar. In this case, even though the bond will still be paying a 3% coupon, its current yield will actually be quite a bit lower (as shown below):
CY = 3 / 110 = 2.73%
[Use our Yield to Call (YTC) Calculator to measure your annual return if you hold a particular bond until its first call date.]
[Use our Yield to Maturity (YTM) Calculator to measure your annual return if you plan to hold a particular bond until maturity.]