Current yield is the simplest yield measure for a bond. It measures only the annual coupon income relative to the current market price.
Formula: > Current Yield = Annual Coupon Payment ÷ Current Market Price
Example: Bond with a 6% coupon (pays $60/year) trading at $900. > Current yield = $60 ÷ $900 = 6.67%
Current yield vs. other yield measures:
| Yield | What it includes | |---|---| | Nominal (coupon) yield | Fixed coupon rate; ignores market price | | Current yield | Annual income / current price; ignores price appreciation to maturity | | Yield to maturity | Total return including coupon income AND price change if held to maturity | | Yield to call | Total return if bond is called at earliest call date |
Yield hierarchy (for discount bonds: price < par): > Nominal yield < Current yield < YTM
Yield hierarchy (for premium bonds: price > par): > Nominal yield > Current yield > YTM
Limitation: Current yield only measures the income component — it ignores the capital gain (for discount bonds) or capital loss (for premium bonds) the investor will experience at maturity.
> Exam tip: Know the yield hierarchy: discount bonds → YTM > current yield > nominal yield. Premium bonds → YTM < current yield < nominal yield. This hierarchy is frequently tested on Series 7, Series 65, and CFP® exams.