Editing Current yield

{{Short description|Ratio of interest to price for a bond}}

The '''current yield''', '''interest yield''',  '''income yield''', '''flat yield''', '''market yield''', '''mark to market yield''' or '''running yield''' is a [[finance|financial]] term used in reference to [[bond (finance)|bond]]s and other [[securities|fixed-interest securities]] such as [[gilts]]. It is the ratio of the annual interest ([[Coupon (finance)|coupon]]) payment and the bond's [[price]]:

<math>
\text{Current yield} = \frac{\text{Annual interest payment} }{\text{Current price} }.
</math> <ref>{{cite book |last1=Martinelli, Lionel, Priaulet, Phillippe and Priaulet, Stephane |title=Fixed Income Securities: Valuation, Risk Management and Portfolio Strategies |date=2003 |publisher=John Wiley & Sons |location=Chichester, England |isbn=0-470-85277-1 |page=49}}</ref><ref>{{cite book |last1=Thau |first1=Annette |title=The Bond Book |date=2001 |publisher=McGraw-Hill |location=New York |isbn=0-07-135862-5 |pages=102–104 |edition=Revised}}</ref>

== Example ==
The current yield of a bond with a face value (F) of $100 and a [[Nominal yield|coupon rate]] (r) of 5.00% that is selling at $95.00 (clean; not including accrued interest) (P) is calculated as follows.

<math>\text{Current Yield} = \frac{F \times r}{P} = \frac{\$100 \times 5.00\%}{\$95.00} = \frac{\$5.00}{\$95.00} = 5.2631\%</math>

== Shortcomings of current yield ==
The current yield refers only to the yield of the bond at the current moment. It does not reflect the total return over the life of the bond, or the factors affecting total return, such as:
* the length of time over which the bond produces cash flows for the investor (the maturity date of the bond), 
* interest earned on reinvested coupon payments, or [[reinvestment risk]] (the uncertainty about the rate at which future cash flows can be reinvested), and 
* fluctuations in the market price of a bond prior to maturity.<ref>{{cite book |title=Thau op cit p. 56}}</ref>

== Relationship between yield to maturity and coupon rate ==
The concept of current yield is closely related to other bond concepts, including [[yield to maturity]] (YTM), and [[coupon yield]]. When a coupon-bearing bond sells at;

* a discount:  YTM > current yield > [[coupon yield]]
* a premium:  [[coupon yield]] > current yield > YTM
* [[par value|par]]:  YTM = current yield = coupon yield.

For zero-coupon bonds selling at a discount, the coupon yield and current yield are zero, and the YTM is positive.

==See also==
* [[Adjusted current yield]]

==References==
{{reflist}}
*[http://www.investopedia.com/terms/c/currentyield.asp Current Yield] at investopedia.com

{{Bond market}}

[[Category:Mathematical finance]]
[[Category:Bond valuation]]
[[Category:Fixed income analysis]]


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