Current Yield

The construction is deliberately simple. Take the coupon rate stated on the bond, multiply it by par to get the cash coupon paid over a full year, then divide that annual cash amount by the bond's current flat price expressed on the same basis. A bond with a 4 percent coupon quoted at 80 per 100 of par pays 4 in cash against an 80 outlay, giving a current yield of 5 percent. Payment frequency does not change the numerator: two semiannual coupons of 2 sum to the same annual 4, which is why current yield carries no compounding assumption at all.

Because the measure is a pure cash-in over cash-out ratio, it has no discounting machinery. It does not ask when within the year the coupons arrive, what the investor earns on reinvested coupons, when the principal is repaid, or whether it is repaid in full. That is the source of both its convenience and its incompleteness: the numerator is contractual, the denominator is a market price, and nothing else enters.

Price relative to par drives a fixed ordering that candidates should be able to reproduce without calculation. When a bond trades at a discount, the coupon is divided by something smaller than par, so current yield exceeds the coupon rate; and because the buyer additionally captures the pull of the price up toward par at redemption, yield to maturity exceeds current yield. The ranking is therefore coupon rate below current yield below yield to maturity. At a premium the chain reverses: coupon rate above current yield above yield to maturity, since the investor absorbs an amortising capital loss. At par all three converge, subject only to compounding conventions.

Simple yield partially closes the gap by adding the discount or premium spread straight-line over the remaining life to the numerator before dividing by the flat price. It moves the figure toward yield to maturity but still ignores the time value of money. For a perpetual there is no redemption to pull price anywhere, so current yield effectively is the yield.

Practitioners call the same number running yield or income yield, and it matters wherever cash flow, not total return, is the binding constraint. Insurers and pension funds with contractual payouts, endowments spending only income, and retail investors living off a portfolio all care what the coupons fund next year. Carry and repo analysis uses the same logic: financing a position profitably depends on the coupon income received against the price paid and the rate paid to fund it.

It is also the natural bridge to other asset classes, since dividend yield on equities and cash-on-cash yield on real assets are built the same way, which makes cross-asset income comparisons possible even though total-return characteristics differ sharply. In distressed and high-yield credit the divergence is instructive: a deeply discounted bond can show a headline running yield far below its yield to worst, and a bond whose coupon is likely to be missed shows a current yield that is arithmetically correct and economically meaningless.

Three competencies are tested. First, compute the number cleanly from a coupon rate, par convention and a quoted price, remembering that market quotes are flat prices and that annual coupon income is the sum of all payments within a year regardless of frequency. Second, rank yield measures by inspection: given only whether a bond trades at a discount, at par or at a premium, state the order of coupon rate, current yield, simple yield and yield to maturity, and explain the direction using the capital gain or loss to redemption.

Third, articulate the limitations precisely rather than dismissing the measure. Current yield omits any price change to maturity, applies no discounting or reinvestment assumption, is not comparable across bonds with materially different maturities or credit quality, and says nothing about embedded options, so it should never be substituted for yield to maturity or yield to worst when total return is the question.