What is Current Yield?
228 reads · Last updated: December 5, 2024
Current yield is an investment's annual income (interest or dividends) divided by the current price of the security. This measure examines the current price of a bond, rather than looking at its face value. Current yield represents the return an investor would expect to earn, if the owner purchased the bond and held it for a year. However, current yield is not the actual return an investor receives if he holds a bond until maturity.
Definition
Current yield refers to the annual income (interest or dividends) from an investment divided by the current price of the security. This metric examines the bond's current price rather than its face value. Current yield represents the return an investor expects to earn if they purchase the bond and hold it for one year. However, it does not reflect the actual return an investor will receive if they hold the bond until maturity.
Origin
The concept of current yield originated in the bond market as investors sought a simple way to assess the immediate income potential of bonds. It became widely used in the early 20th century, particularly as the bond market matured.
Categories and Features
Current yield is primarily used in the bond market but can also apply to the dividend yield in the stock market. Its features include simplicity and ease of understanding, making it suitable for quickly assessing the immediate income from an investment. However, it overlooks more comprehensive yield measures like Yield to Maturity (YTM) and does not reflect the actual return for long-term holdings.
Case Studies
Case 1: Suppose a company's bond is currently priced at $950 with an annual interest of $50, the current yield would be 50/950 = 5.26%. Case 2: A publicly listed company's stock is priced at $100 with an annual dividend of $4, resulting in a dividend yield of 4/100 = 4%. These examples illustrate how current yield helps investors quickly assess the immediate income from investments.
Common Issues
Investors often mistakenly equate current yield with the final yield, but it does not account for price changes at bond maturity. Additionally, current yield is not suitable for evaluating the overall return of long-term investments.
