The current yield is a financial metric used to calculate the annual income generated by an investment relative to its current market price. It is expressed as a percentage and is particularly relevant for fixed-income securities such as bonds. The formula for calculating current yield is:

\[ \text{Current Yield} = \left( \frac{\text{Annual Interest Payment}}{\text{Current Market Price}} \right) \times 100 \]

Here’s a breakdown of the components in the formula:

– **Annual Interest Payment:** This is the annual interest income generated by the investment. For bonds, it is typically a fixed interest rate applied to the face value of the bond. The interest payment is also known as the coupon payment.

– **Current Market Price:** This is the current trading price of the investment in the secondary market. For bonds, it may be different from the face value if the bond is trading at a premium or a discount.

The current yield provides investors with a quick way to assess the income return on their investment based on the current market conditions. It is important to note that the current yield does not take into account any capital gains or losses that may result from changes in the market price of the investment.

Example:

Let’s say you have a bond with a face value of $1,000, an annual interest payment (coupon) of $50, and a current market price of $950. The current yield would be calculated as follows:

\[ \text{Current Yield} = \left( \frac{\$50}{\$950} \right) \times 100 \approx 5.26\% \]

In this example, the current yield is 5.26%, indicating that the bond is providing an annual income equivalent to 5.26% of its current market price.

Investors should be aware that while the current yield is a useful metric for income assessment, it has limitations. It does not consider the potential changes in the market price of the investment, and it does not account for the time value of money. Therefore, it is often used in conjunction with other metrics, such as yield to maturity (YTM), to provide a more comprehensive analysis of an investment’s potential return.