Current Yield is a financial metric used to measure the annual income (interest or dividends) generated by an investment relative to its current market price. It is most commonly applied to bonds and dividend-paying stocks, helping investors assess the income return they can expect from holding the investment over the short term, without considering potential changes in its price or maturity.

Key Aspects of Current Yield:

1. Calculation:
   • Formula:

     $$ \text{Current Yield} = \frac{\text{Annual Income (Interest or Dividends)}}{\text{Current Market Price of the Investment}} $$

   • Example: If you own a bond that pays \$50 in annual interest and its current market price is \$1,000, the current yield would be:

     $$ \text{Current Yield} = \frac{50}{1000} = 5\% $$

   • For a stock, if the annual dividend is \$2 per share and the current stock price is \$40, the current yield would be:

     $$ \text{Current Yield} = \frac{2}{40} = 5\% $$

2. Application to Bonds:
   • Definition: In the context of bonds, the current yield represents the annual interest income (coupon payment) relative to the bond’s current market price.
   • Relevance: The current yield provides a snapshot of the income return on a bond if it were purchased at its current price, but it does not account for the bond’s price at maturity or any potential capital gains or losses.
3. Application to Dividend-Paying Stocks:
   • Definition: For stocks, the current yield is the annual dividend payment divided by the current share price, indicating how much income an investor can expect relative to the cost of the shares.
   • Relevance: This yield helps investors compare the income-generating potential of different stocks or assess the attractiveness of a stock’s dividend relative to its price.
4. Comparison with Other Yields:
   • Yield to Maturity (YTM): Unlike current yield, which only considers the income relative to the current price, YTM accounts for the total return expected if a bond is held until maturity, including capital gains or losses.
   • Dividend Yield: Current yield for dividend-paying stocks is sometimes referred to as dividend yield, but “current yield” is typically used in bond terminology.
5. Limitations:
   • Short-Term Focus: Current yield does not consider the bond’s maturity date, potential price changes, or reinvestment of dividends or interest, making it a short-term measure.
   • Not a Total Return Indicator: It doesn’t account for capital gains or losses that might occur if the bond or stock is sold before maturity or if the stock price changes, so it’s not a comprehensive measure of an investment’s total return.
6. Examples of Use:
   • Bond Investing: An investor looking for income might prefer bonds with higher current yields, assuming they are comfortable with the bond’s credit risk and other factors.
   • Dividend Stocks: Income-focused investors might select stocks with higher current yields, especially if they are seeking regular income through dividends.

Summary:

Current Yield is a measure of the annual income (interest or dividends) generated by an investment relative to its current market price. It is calculated by dividing the annual income by the current market price of the investment. Current yield is commonly used to evaluate bonds and dividend-paying stocks, providing a snapshot of the income return on an investment at its current price. However, it is a short-term measure and does not account for capital gains, losses, or the total return potential of the investment.