Current yield, which is often used in relation to fixed-interest securities, refers to the ratio between the annual interest payment and the clean price. If the current yield is lower than the annual interest payment or bond coupon rate, then there is a premium on the bond.
By determining a security’s current yield, one is able to get information on the yield at present, without taking into account profits or risks from reinvestment or other factors which could influence returns. Although the current yield can only supply information on present returns.
Determining this could prove to be useful for decisionmaking. For instance, gathering information on the current yield for a particular period and comparing it with the yields of the same security during other periods may help investors gain a better idea of the benefits and risks that come with the investment.
Should an investor be interested in gathering more information on how well a bond is likely to perform in its lifetime, he may make use of other formulae. The yield to maturity approach, for instance, can provide clearer insight into a bond’s performance.
The term current yield may also be substituted with income yield, running yield, or interest yield.
