Current yield of a bond

What is current yield of a bond  ?

Current Yield of a bond is the interest income earned by an investor when purchased in the secondary market and held for a period of a year.

It is calculated by dividing the Annual Interest Income of the bond by its Current market price. Current yield is also known as running yield.

The Current yield is based on the market price of the bond, which is not consistent and fluctuates based on the prevalent market conditions. Thus the Current yield of a bond may not be the same throughout the term of the bond.

What is the Relationship between Nominal yield and Current yield ?

Nominal yield is calculated by dividing the annual interest income of the bond by its Par value / Face value.

Current yield is the yield of a bond based on market price.

a.    When the market price of the bond is greater than its par value the Nominal yield is greater than the Current yield of the
bond.

b.   When the market price of the bond is lower than its par value the Nominal yield is lower than the Current yield of the bond.

c.    When the market price of the bond is equal to its par value the Nominal yield is equal to the Current yield of the bond.

What are the Drawbacks of Current yield ?

It does not take into account the concept of time value of money.

What is the Relationship between Yield to maturity and Current yield ?

Yield to maturity is. Current yield is the yield of a bond based on market price.

a.   When the market price of the bond is greater than its par value the yield to maturity is greater than the Current yield of the bond.

b.   When the market price of the bond is lower than its par value the yield to maturity is higher than the Current yield of the bond.

c.   When the market price of the bond is equal to its par value the Yield to maturity is equal to the Current yield of the bond.

What is current yield formula ?

The formula for calculating the Current yield of a bond is

Current Yield = Annual Interest / Current market price

 How do you calculate the current yield of a bond ?

Example :

Company FP has issued a bonds with a face of $ 1,000 with a coupon rate of 10 %. 

The current market price of the bond is $ 1,250. Calculate the current yield of the bond.

Solution :

The formula for calculating the current yield of a bond is

= Annual Interest / Current market price

 

The annual Interest on the bond = Face value of the bond * Coupon rate

= $ 1,000 * 10 % = $ 100

 

Thus we have current yield of the bond as

= $ 100 / $ 1,250

= 0.08 = 8 %

Thus the current yield of the bond is = 8 %

Leave a Reply

Your email address will not be published.