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Bond Current Yield for Investments
Investments and bonds have several rates of return and yield indicators. One of them is the current yield. To determine current yield, you need to divide the annual interest payments on a bond and divided them into the current market price. This can also be done with stocks funds that have annual dividends.
The current yield will be lower than the nominal (coupon rate) rate on the bond when the investment is bought at a premium. Since the coupon rate only pays to par, the premium paid will show a lower current number. If a bond is bought at a discount, the nominal yield will be higher.
Calculation
A bond has a nominal yield or coupon rate of 6%. This is the fixed rate of interest paid to bond investors. If the current price on the bond was $95 or $950, the current yield can be found by dividing $60 by $950. In this example the calculation would come out to 6.31%.
The current yield is always higher than the coupon rate when the bond is selling at a discount. The bond investor is getting a 6% rate of return on the bond and will receive par at maturity. This increases the bond yield. The yield to maturity would also be higher. That calculation is handled differently though, as it will take into account the nominal rate, pricing and years to maturity.
As with any bond, the yield to maturity and yield to call are the most important indicator - when judging total rate rate of return on a bond.
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