Current yield
Also written Running yield · Interest yield
A bond's annual coupon in rupees divided by its current market price — the cash income the bond throws off this year, ignoring any gain or loss at redemption.
In plain language
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.
How it works
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.
The formula
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.
A worked example
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:
| Price paid | Bonds bought | Annual coupon income | Current yield |
|---|---|---|---|
| Rs 109.50 | 4,566 | Rs 54,792 | 10.95% |
| Rs 100.00 | 5,000 | Rs 60,000 | 12.00% |
| Rs 92.00 | 5,434 | Rs 65,208 | 13.04% |
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.
Why NISM asks about it
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.
Common exam traps
- 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.
Where this is taught
- Series IV · Chapter 1: Introduction to Interest Rate, Interest Rate Instruments and Fixed Income Marketsintroduced here
- Series XXI-B · Chapter 4: Investing in Fixed Income Securitiesintroduced here
- Series II-A · Chapter 3: Characteristics of Debt Securitiesintroduced here
- Series II-B · Chapter 3: Characteristics of Debt Securitiesintroduced here
- Series XV · Chapter 3: Terminology in Equity and Debt Marketsintroduced here
- Series V-D · Chapter 18: Introduction to Interest Rate, Interest Rate Instruments and Fixed Income Marketsintroduced here
- Series X-A · Chapter 9: Investing in Fixed Income Securitiesintroduced here
- Series XII · Chapter 2: Securities: Types, Features and Concepts of Asset Allocation and Investingintroduced here
Related terms
- Face valueThe denomination a company's capital is divided into and carried in its books — fixed, printed on the certificate, and the base on which dividend percentages and stock splits are computed.
- Yield to MaturityThe single discount rate at which a bond's future coupons and redemption amount add up to exactly its market price today — the return you actually earn if you hold it to maturity.
- Zero coupon bondA bond that pays no coupons: it is issued below face value and repays the face value at maturity, so its duration equals its maturity.
- Coupon rateThe rate of interest a bond pays, applied to its face value and never to its market price — which is why the coupon tells you the cash flow but not the return.
- Dividend yieldDividend per share divided by the share's market price — the cash income a share pays relative to what it costs today. It falls as prices rise and rises as they fall.
- Bond Equivalent YieldThe annualised simple-interest return on a money market instrument, computed on price and a 365-day year, so instruments of different maturities can be compared on one basis.
- Discount yieldThe return on a discount instrument expressed against its face value on a 30-day month and 360-day year — the convention the 91-day T-Bill futures contract is quoted and settled on.
- Effective interest rateThe rate actually earned over a year once compounding within the year is counted — always at or above the quoted nominal rate, and equal to it only when interest is paid once a year.
- Spot rateThe true return on money invested today for one stated term with no interim cash flow — read straight off a zero-coupon instrument, and the only rate a cash flow should be discounted at.
- Holding period returnThe total of coupons, income earned on reinvesting them and any capital gain, expressed as a percentage of the purchase price — a crude return for the period actually held, with no compounding in it.
- Realised YieldThe annualised, compounding return earned on a bond sold before maturity, factoring in coupons, the interest earned reinvesting them, and the sale price — sharper than holding period return.
- Clean priceThe quoted price of a coupon bond, excluding interest accrued since the last coupon date. Bonds trade at the clean price and settle at the dirty price, which adds accrued interest.
- Effective yieldThe annual rate that would leave an investor with the same amount after one year as the quoted nominal rate does once its more frequent interest payments are taken into account.