If you’re new to the world of bonds, you may be confused by the term “current yield.” But it’s really not that complicated, and current yield can be a helpful way to compare the annualized return on two bonds.

What is the bond current yield? Understanding the current yield definition

The current yield of a bond is the annualized return on that bond. It’s calculated by dividing the coupon payment by the price of the bond.

Example: let’s say you buy a $1,000 Treasury bill with a 3% coupon and six-month maturity. If you sell this bill at its par value ($1,000), then your current yield will be 6%. If it was sold for less than par value, your current yield would be higher because you would have earned more than 6% per year on your investment over those six months (even though you don’t technically earn anything until maturity).

Bond current yield calculator: How to calculate current yield

To calculate the current yield, you need to find the annualized rate of return on a bond. This is a little more difficult than simply adding up all the cash flows and dividing by how much you paid for it.

Here is what you need to know in order to calculate the bond current yield:

  • The face value
  • The frequency
  • The coupon rate
  • The bond price

What is the difference between bond current yield and yield to maturity (YTM)?

In the simplest terms, the current yield is the annual interest rate of a bond. Yield to maturity (YTM) is the total return on a bond.

This means that when you invest in a bond, you can find out how much your investment will be worth at any point in time by using its current yield and then calculating its YTM. You’ll have to do some math for this part, but it’s not too difficult if you follow along with me!

FAQ

What is the yield of a bond?

A bond’s yield to maturity (YTM) is the annualized interest rate that discounts the bond’s coupon and face value payoffs to the market price.

What do high bond yields mean?

The rise in yields means investors expect higher interest rates and are selling their bonds because higher rates would result in a decline in the bond price of existing bonds.

Do you want high or low bond yields?

Low-yield bonds may be better for investors who want a virtually risk-free asset, or one who is hedging a mixed portfolio by keeping a portion of it in a low-risk asset. High-yield bonds may instead be better-suited for investors who are willing to accept a degree of risk in return for a higher return.