Fixed Income
Current Yield and What It Tells You Today
When investors look at bonds, one of the first questions is simple: What income am I earning right now?
Current yield answers exactly that. It focuses on the cash income a bond generates relative to its current market price, not its price at maturity or long-term return.
Because of this narrow focus, current yield is easy to compute but also easy to misinterpret.
What Current Yield Really Measures
Current yield reflects the annual coupon income relative to the bond’s current market price.
It captures income return only. It ignores capital gains or losses that may occur if the bond is held to maturity or sold later. In other words, it answers a short-term income question, not a total return question.
Why Market Price Matters
Current yield changes when the bond price changes.
If the bond price falls, current yield rises.
If the bond price rises, current yield falls.
This inverse relationship is why current yield reacts immediately to interest rate movements, even though the coupon itself remains fixed.
What Current Yield Does Not Capture
This is where many students go wrong.
Current yield does not:
- reflect time value of money
- account for reinvestment of coupons
- include price appreciation or depreciation
As a result, it does not measure the true return of a bond over time.
Exams often test whether candidates recognise these limitations.
Current Yield vs Yield to Maturity
Current yield and yield to maturity answer different questions.
Current yield focuses only on current income.
Yield to maturity considers total return over the bond’s life, including price changes and reinvestment.
Confusing the two leads to incorrect conclusions in bond analysis.
When Current Yield Is Useful
Current yield is useful when:
- investors care mainly about income today
- bonds are being compared on a cash-income basis
- prices are near par and maturities are long
It is less useful for comparing bonds with different maturities or prices far from par.
Common Student Misunderstandings
Many students assume current yield equals bond return. It does not.
Others believe a higher current yield always means a better investment. It may simply reflect higher risk or a lower bond price.
Some forget that current yield ignores capital losses at maturity.
These misunderstandings frequently appear in exam traps.
Closing Reflection
Current yield provides a quick snapshot of income relative to price, but it tells only part of the story. It is a measure of today’s income, not tomorrow’s return. For CFA and FRM preparation, the key is understanding what current yield includes—and, more importantly, what it leaves out. Once that distinction is clear, bond yield questions become far easier to interpret.
