Current yield
Capital MarketsA bond's coupon divided by its market price, which measures income received and ignores the pull back to par.
Also written: running yield, income yield
Current yield is the annual coupon divided by the current price. It answers a narrow question honestly: how much income does this bond throw off per euro invested. An investor who cares about the cash arriving each year, an insurer matching an annual liability for instance, has a genuine use for it.
It is not a return. It ignores the difference between what you pay now and the 100 you receive at maturity, and that difference is frequently the larger half of the answer. On a bond bought at a discount it understates the return, and on one bought at a premium it overstates it.
What makes it dangerous rather than merely imprecise is that the error has a direction. A discount bond looks cheap on current yield and a premium bond looks generous, when the market has priced both to almost the same yield to maturity. Comparing two bonds on current yield is really comparing their coupons, which is to say comparing the days on which they happened to be issued.
Worked example
Illustrative. A 5% coupon bond at 92 has a current yield of 5.43% and a yield to maturity of about 6.95%.
A 9% coupon bond from the same issuer at the same maturity, trading at 107, has a current yield of 8.41% and a yield to maturity of about 7.28%.
Ranked on current yield the second looks three points better. Ranked on yield to maturity they are the same credit at the same price of risk.