Bond Yield Calculator

Bond yield is not a single number

Ask what a bond yields and you have really asked three questions, because a bond has several yields, each measuring its return in a different way. Confusing them is one of the most common mistakes people make with bonds, so it is worth laying them out.

First is the coupon yield, better known as the coupon rate: the fixed annual interest set when the bond is issued, expressed as a percentage of face value, which never changes over the bond's life. Second is the current yield: the annual coupon measured against what the bond costs today in the market, which moves as the price moves. Third is the yield to maturity: the complete return you would earn holding the bond to the end, folding in not just the coupons but the gain or loss from buying above or below face value. This calculator computes the second of these, the current yield, so it is the one to understand here.

What this tool measures: current yield

Current yield answers a practical question: for the price I would pay today, how much annual income does this bond throw off? It is the yearly coupon income as a percentage of the current market price.

The calculation runs in two short steps. First, the annual coupon in dollars comes from the bond's face value and its coupon rate, since the coupon rate is a percentage of face value. Then that annual coupon is divided by the current price and turned into a percentage. In short, current yield = annual coupon ÷ current price. Because the price sits on the bottom, the current yield rises when the price falls and falls when the price rises, which is why it can drift well away from the coupon rate stamped on the bond.

A worked example

Suppose a bond has a par value of 1,000 and a 6% coupon, and it is currently trading at 920.

The annual coupon is 6% of 1,000, which is 60 a year. Divide that 60 by the current price of 920 and the current yield is about 6.52%. Notice that it comes out higher than the 6% coupon rate. That is because you are buying the bond for less than its face value: you collect the same 60 of coupon income, but you pay only 920 to get it, so your income relative to your outlay is a little better than the headline 6%. Had the bond instead been trading above face value, the same logic would have pulled the current yield below the coupon rate.

Current yield against the coupon rate

The relationship between the current yield and the coupon rate is worth pinning down, because it tells you at a glance whether a bond is trading above or below its face value.

If the bond trades at exactly its face value, the two are identical: the coupon measured against face value is the same as the coupon measured against price. If the bond trades below face value, at a discount, the current yield is higher than the coupon rate, because you are paying less to receive the same coupons. And if it trades above face value, at a premium, the current yield is lower than the coupon rate, because you are paying more for those same coupons. So a current yield above the coupon rate quietly signals a discount price, and one below it signals a premium. The gap between the two numbers is entirely a story about how far the price has moved from face value.

Current yield against yield to maturity

Useful as it is, current yield captures only part of a bond's return, and knowing what it leaves out keeps you from over-relying on it. Current yield looks only at the coupon income relative to today's price, as if you were holding the bond for the next year and nothing else mattered.

What it ignores is the journey of the price back to face value by maturity. If you bought at a discount, you will also collect a gain as the bond climbs to its full face value at the end; if you bought at a premium, you will absorb a loss as it settles back down. Yield to maturity accounts for all of that, plus the timing of every payment, which is why it is the more complete measure of return. The two line up in a predictable order: for a bond bought at a discount, the coupon rate is lowest, the current yield sits in the middle, and the yield to maturity is highest; for a premium bond, the order reverses. To capture that fuller return, our bond yield to maturity calculator does the work, and to see the price these yields attach to, our bond calculator values the bond itself.

When current yield is the right tool

None of this means current yield is second-rate; it means it has a specific job. Its strength is speed and clarity for one particular question: how does the income from this bond compare, right now, to the price I would pay for it?

That makes it especially handy when you are sizing up bonds in the secondary market that are trading away from face value, at a discount or a premium, where the coupon rate alone would mislead you about the income on offer. If your aim is the annual cash a bond generates for each dollar invested, current yield answers it directly and without fuss. If your aim is the total return from holding the bond to the end, that is when you reach past current yield to yield to maturity.

Questions people ask

What is a bond's current yield?

It is the bond's annual coupon income as a percentage of its current market price, found by dividing the annual coupon by the price. It shows the income return you would get for what you pay today, and it changes as the market price changes.

How is current yield different from the coupon rate?

The coupon rate measures the coupon against the bond's face value and never changes. Current yield measures the same coupon against the current market price. They match only when the bond trades at face value; at a discount the current yield is higher, and at a premium it is lower.

Is current yield the same as yield to maturity?

No. Current yield counts only the coupon income relative to price. Yield to maturity also includes the gain or loss as the price moves to face value at maturity, along with the timing of payments, making it a more complete measure of a bond's total return.

Which yield should I use?

Use current yield for a quick read on income relative to price, which is most useful for bonds priced away from face value. Use yield to maturity when you want the total return from holding the bond until it matures. Each answers a different question.

References

The distinction between coupon yield, current yield, and yield to maturity, and the calculation of current yield as annual coupon divided by market price, follow FINRA and Wall Street Prep below.

1. FINRA. Understanding Bond Yield and Return. finra.org
2. Wall Street Prep. Current Yield. wallstreetprep.com