Current yield = [Annual coupons] ÷ [Current bond price]
Current yield formula is utilized to determine the annual coupon payments relative to its current price. In other words current yield only take in to account the current price instead of face value or original value. While bond equivalent yield takes in to account the face value of a bond while calculating the return on such investments.
How current yield formula is useful for investors
As the name depicts current yield formula is used to calculate the yield from a bond by using its current price. Typically, bond yield formula, Yield to call, yield to maturity and some others yield equations are used along with current yield to evaluate the magnitude of returns.
In addition to all above some financial analysts use risk ratios along with yield calculations to determine a better option while comparing various bonds. The general rule for comparing is to rate different options according to risk rating and return. One will expect a higher return for a higher risk, similarly if two options are available at the same risks then an option with greater return will be preferred.
Current yield formula example
For instance, if a bond is offering a coupon of $120 on annual basis, and was issued at $1,100 then the current yield of this bond will be 10.9%. If this bond is currently selling at $950 at present time in the market due to either downfall in price or due to lower demand then the return would be different.
When we put the available values in the formula we get the results are;
Current yield formula = $120 ÷ $950
The result will be current yield at a rate of 12.63%
Current yield vs. other yield formulas
As it is stated earlier a number of bond yield formulas are used to calculate return on investment. However, as the name suggest current yield offers the return calculations based on current market price. While on the other side the bond yield or equivalent yield formula consider face value or original price of the bond to calculate return.
The yield to maturity ratio differs from current yield as it looks in to more depth than current yield and considers future inflows, increasing or decreasing price, face value and current price for calculation. However, on the other side current yield only look in to the current price of market to calculate yield which is much quick but not a deep analysis.