Current Yield of a Bond Formula (Table of Contents)
Current Yield Formula
Current yield formula is a different sort of formula; because it doesn’t calculate the return on the original price, rather it calculates the return on the current price.
Let’s have a look at the formula of current yield below.
Current Yield Formula Example
Let’s take a practical example to illustrate this formula of current yield.
Betty has invested into two bonds. The original prices of these two bonds were $1000 and $1500. The risk for both of these bonds is similar. The annual coupons for each of these bonds are $150 and $180 respectively. The current prices of these bonds are $1200 and $1800 respectively. Find out the bond yield and current yield for each of these bonds. And on the basis of yield, which bond Betty should choose to invest in?
Let’s find out the bond yield first.
- The bond yield for the first bond is = $150 / $1000 = 15%.
- The bond yield for the second bond is = $180 / $1500 = 12%.
Now, we will calculate the current yield of a bond. We have been given the current prices and the same annual coupons will be applied.
- The yield of the first bond is = $150 / $1200 = 12.5%.
- The yield of the second bond is = $180 / $1800 = 10%.
On the basis of yield, Betty should choose to invest in the first bond. Since both of these bonds are similar in terms of risk, we can easily say that first bond will be the best among two.
Explanation of Current Yield Formula
No matter at what the original price of the bond is; the current yield formula will only calculate the return on the current price (not on the original price). That’s why it’s not called the bond yield.
In the case of current yield of a bond, we calculate the return on the original price. However, in this case, we will only consider the current price while calculating the return.
For example, let’s say that an investor has bought a bond at a price of $120. And the bond promises to return 10% annual coupon, i.e. $12. However, the current price of the bond is $100. The bond yield is 10% still because it would be calculated on the original price. But the yield would be = ($12 / $100) = 12%.
How to Use the Formula of Current Yield?
For an investor, higher risk should result in the higher return. That’s why whenever she looks at multiple investments; she needs multiple ratios to judge the worthiness of each investment.
In regards to bond investments, investors look at quite a few ratios – current yield of a bond, yield to maturity, yield to call etc. The current yield of a bond is specifically used to see how two risky investments turn out in the same measuring grid.
Investors always look for premium for taking higher risk. If it so happens that the investors have the options to choose one from two high risk bond investments, then the investors will only choose the one that pays more return. That’s why it is being used and is such an important indicator.
Current Yield Calculator
You can use the following Current Yield Calculator
|Current Yield Formula =||
Current Yield in Excel (with Excel template)
Let us now do the same example above in Excel. You need to provide the two inputs of First Bond and Second Bond.
You can easily calculation of current yield in the template provided. Let’s find out the current yield of a bond first by using the formula of current yield.
Now, we will see the calculation of current yield of a bond. Current Prices and the same Annual Coupons will be applied.
You can download this Current Yield excel template here – Current Yield Excel Template
This has been a guide to Current Yield formula, current yield calculator, along with examples and excel templates. You may also look at the following articles to enhance your fixed income skills.
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