The formula
How to calculate bond yield
Current yield is the annual interest a bond pays as a percentage of what you would pay for it today. Because bonds trade away from face value, the coupon rate printed on the bond and the yield an actual buyer receives are rarely the same.
The coupon is fixed against face value and never changes. The price does, so a bond bought below par yields more than its coupon rate and one bought above par yields less.
What to enter:
- Face value — the amount repaid at maturity, usually 100 or 1,000
- Coupon rate (%) — the annual interest as a percentage of face value
- Market price
No submit button: type and the answer moves. Your inputs end up in the link, so the page can be shared already filled in.
Worked example
Work through the defaults on this page:
- Face value: 1,000
- Coupon rate: 4.5 %
- Market price: 920
That gives:
- Current yield: 4.891 %
- Annual coupon payment: 45
- Discount to face value: 8 %
Reading the result
Current yield only counts the income. It ignores the gain or loss when the bond matures at face value — worth £80 per bond in the example above. Yield to maturity is the measure that includes it.
Where this goes wrong. Reading a high current yield as a bargain. Prices fall for a reason: either market rates rose, which affects everything, or the issuer's credit deteriorated, which affects the odds of being repaid at all.
Because a bond paying a fixed 4.5% has to compete with new bonds paying more. The only way an old bond becomes competitive is for its price to drop until the return matches.
Current yield counts only the coupon income against today's price. Yield to maturity also includes the pull towards face value as the bond approaches redemption, so it is the fuller measure of total return.
The answer it gives you is current yield. With 1,000 face value, 4.5 % coupon rate and 920 market price, that comes to 4.891 %. Change any field and the figure moves with it.