Current yield

Current yield measures the annual income a bond (or preferred stock) generates as a percentage of its current market price. The formula is simple: current yield = annual interest ÷ market price. A bond paying $50 per year that trades at $1,000 has a current yield of 5%.

The key insight is that current yield changes as the bond's price changes, even though the coupon payment stays fixed. If that same bond falls to $900, its current yield rises to $50 ÷ $900 = 5.6%. If it climbs to $1,100, the current yield drops to 4.5%. This inverse relationship between price and yield is often taught with the bond seesaw: when price goes up, yield goes down, and vice versa.

Current yield differs from nominal yield (the coupon rate), which is fixed at issuance and always calculated against par value. For a bond trading at a discount (below par), current yield is higher than nominal yield; for a bond trading at a premium (above par), current yield is lower than nominal yield. Only when a bond trades exactly at par are the two equal. Current yield also ignores any gain or loss the investor realizes at maturity, which is why yield to maturity is a more complete measure of total return.

The SIE, Series 65, and Series 66 exams all test yield calculations and the relationships among nominal yield, current yield, yield to maturity, and yield to call. Expect questions that give you a coupon and a market price and ask for the current yield, or that ask you to rank the yields of a discount or premium bond.