Current Yield
by MaestriIf you examine brokerage house reports on bonds, you will often see reference to a bond’s current yield. The current yield is the annual interest payment divided by the bond’s current price. For example, if MicroDrive’s bonds with a 10 percent coupon were currently selling at $985, the bond’s current yield would be 10.15 percent ($100/$985).
Unlike the yield to maturity, the current yield does not represent the rate of return that investors should expect on the bond. The current yield provides information regarding the amount of cash income that a bond will generate in a given year, but since it does not take account of capital gains or losses that will be realized if the bond is held until maturity (or call), it does not provide an accurate measure of the bond’s total expected return.
The fact that the current yield does not provide an accurate measure of a bond’s total return can be illustrated with a zero coupon bond. Since zeros pay no annual income, they always have a current yield of zero. This indicates that the bond will not provide any cash interest income, but since the bond will appreciate in value over time, its total rate of return clearly exceeds zero.
Explain the difference between the yield to maturity and the yield to call.
How does a bond’s current yield differ from its total return?
Could the current yield exceed the total return?
Taken From : Five-Minute MBA – Corporate Finance
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