Current yield

Current yield is the quickest possible answer to "what is this bond paying me right now?"

Take the rupees of interest the bond pays in a year. Divide by what the bond costs today. That is it — one division, no discounting, no maturity date needed.

It is the bond equivalent of dividend yield on a share: income received, measured against price paid. And like dividend yield, it deliberately ignores what happens to your capital.

The coupon in rupees is frozen at issue. The price is not. So the entire movement in current yield comes from the denominator.

The workbook states the relationship both ways round: if the market price is below face value, current yield is higher than the coupon rate; if the price is above face value, current yield is lower than the coupon. A bond trading exactly at par has a current yield equal to its coupon rate, which is the only case where the two numbers agree.

What current yield leaves out is the whole point of the trap. A bond bought at Rs 95 will redeem at Rs 100 — that Rs 5 gain is real money, spread over the remaining life, and current yield does not see a rupee of it. That gain is exactly what Yield to Maturity adds back.

Current yield = (Annual coupon in rupees ÷ Market price) × 100

The workbook words this as "coupon rate divided by market price", and then computes it with the coupon in rupees — 12, not 12 per cent — over the price. Use the rupee coupon.

The workbook's own case: a bond paying an annual coupon of 12 per cent — Rs 12 a year on face value of Rs 100 — trading at Rs 109.50.

Current yield = (12 ÷ 109.50) × 100 = 10.95 per cent

The bond trades above par, so its current yield of 10.95 per cent sits below its 12 per cent coupon. Exactly as the rule predicts.

Now take the same bond the other way. Interest rates rise, the price falls to Rs 92:

Current yield = (12 ÷ 92) × 100 = 13.04 per cent

And see the size of the effect on a real holding. An investor with Rs 5,00,000 to place:

Same bond, same issuer, same Rs 12 coupon per unit. The only thing that changed is how many units Rs 5 lakh buys — and that is the whole of current yield.

Chapter 2 places Current Yield immediately after "Yield and Price" and immediately before Yield to Maturity, with the Rs 109.50 illustration worked in full. That sequencing is the examiner's hint: the standard question hands you a coupon and a market price and asks for the current yield, or asks which of coupon / current yield / YTM is highest for a bond trading at a discount. Both are one-line answers once you have the ordering rule.

• Divide by market price, not face value. Coupon ÷ face value is just the coupon rate again, and it is the single most common wrong answer.
• Use the coupon in rupees. "Coupon rate ÷ market price" read literally gives 12% ÷ 109.5, which is nonsense. The workbook's own arithmetic is 12 ÷ 109.5.
• Current yield ignores the redemption gain or loss entirely. For a bond bought at a discount, current yield understates your true return; that is why it is always below YTM for a discount bond.
• A zero coupon bond has a current yield of zero. There is no coupon to divide. Its entire return is the discount to face value, so only YTM describes it.
• Current yield says nothing about maturity. Two bonds at the same price and coupon have the same current yield whether one matures next year or in 2045 — and wildly different YTMs.