What Does Current Yield Mean?

Annual income (interest or dividends) divided by the

current price of the security. This measure looks at
the current price of a bond instead of its face value
and represents the return an investor would expect
if he or she purchased the bond and held it for a
year. This measure is not an accurate reflection of
the actual return that an investor will receive in all
cases because bond and stock prices are constantly
changing due to market factors.

Also referred to as "bond yield", or "dividend yield"

for stocks.
For example the current yield of a 10 year, 12 %
coupon bond with a par value of Rs 1,000 and
selling for Rs 950 is 12.63%.
Current Yield = 120/950 = 12.63%
The current yield calculation reflects only the coupon
interest rate. It does not consider the capital gain
(or loss) that an investor will realize if the bond is
purchased at a discount (or premium) and held till
maturity. It also ignores the time value of money.
Hence it is an incomplete and simplistic measure of
yield. It ignores the actual return; it only calculates
the coupon interest rate.
For example, if a bond is priced at Rs 95.75 and has
an annual coupon of Rs 5.10, the current yield of the
bond is 5.33%. If the bond is a 10-year bond with
nine years remaining and you were only planning to
hold it for one year, you would receive the Rs 5.10
as interest, but your actual return would depend on
the bond's price when you sold it. If, during this
period, interest rates rose and the price of your bond
fell to Rs 87.34, your actual return for the period
would be -3.5% (-3.31/ 95.75) because
although you gained Rs 5.10 in dividends, your
capital loss was Rs 8.41 ( 95.75 87.34)
Yield to Maturity (YTM)
The rate of return anticipated on a bond if it is held
until the maturity date. YTM is considered a long-
term bond yield expressed as an annual rate. The
calculation of YTM takes into account the current
market price, par value, coupon interest rate and
time to maturity. It is also assumed that all coupons
are reinvested at the same rate. Sometimes this is
simply referred to as "yield" for short.
An approximate YTM can be found by using a bond
yield table. However, because calculating a bond's
YTM is complex and involves trial and error, it is
usually done by using a programmable business
calculator or on basis of formula mentioned below.
Yield to Maturity

Par Value:

Market
Value:

Annual %
Rate:

Maturity in
Years:
Payments:
Quarterly
 Semi -

Annually
Annually

Yield to
7.53%
Maturity:

Interpretation:
A bond that pays 1 coupon(s)
of 10% per year, that has a
market value of Rs 110.00,
and that matures in 5 years
will have a yield to maturity of
7.53%.
What does it mean? Well,
bond investors don't just buy
only newly issued bonds (on
the primary market) but can
also buy previously issued
 bonds from other investors
(on the secondary market).
Depending on whether a
bond on the secondary
market is bought at a
discount or premium, the
actual rate of return can be
greater or lower than the
quoted annual coupon rate.
This is why bond investors
need to look at YTM, which
measures the bond's yield
from the day the investor
buys it to the day it expires,
when the principal is paid to
the bondholder.

Yield to Maturity

Par Value:

Market
Value:
 Annual %
Rate:

Maturity in
Years:
Payments:
Quarterly

Semi -

Annually
Annually

Yield to
11.37%
Maturity:

Interpretation:
A bond that pays 1 coupon(s)
of 10% per year, that has a
market value of Rs 95.00,
and that matures in 5 years
 will have a yield to maturity of
11.37%.
What does it mean? Well,
bond investors don't just buy
only newly issued bonds (on
the primary market) but can
also buy previously issued
bonds from other investors
(on the secondary market).
Depending on whether a
bond on the secondary
market is bought at a
discount or premium, the
actual rate of return can be
greater or lower than the
quoted annual coupon rate.
This is why bond investors
need to look at YTM, which
measures the bond's yield
from the day the investor
buys it to the day it expires,
when the principal is paid
to the bondholder.

Data:
Par Value of Bond: Rs 1,000/-
Coupon rate: 12%
Maturity: After 10 years
Current market price: Rs 950
Calculate Current Yield and YTM ?
YTM = C + (FV-P) /n
0.4FV+0.6P

Answer: 120+ (1000-950)/10

0.4*1000+0.6*950

=12.89%

Current Yield = (120/950) * 100 = 12.63%

The YTM calculation considers the current coupon

income as well as the capital gain or capital loss that
the investor shall realize by holding the bond to
maturity. In addition it takes into account the timing
of the cash flows. The YTM of a bond is the internal
rate of return (IRR) on an investment in the bond. It
can be interpreted as the compound rate of return
over the life of the bond, assuming that all the
coupons can be reinvested at a rate of return equal
to the YTM of the bond.

Par Value of Bond: Rs 1,000/-

Coupon rate: 12%
Maturity: After 10 years
Current market price: Rs 1050
Calculate Current Yield and YTM ?
YTM = C + (FV-P) /n
0.4FV+0.6P

Answer: 120+ (1000-1050)/10

0.4*1000+0.6*1050

=11.16%

Current Yield = (120/1050) * 100 = 11.40%