The return on a bond yield is calculated using a couple of key measures. The primary one we'll focus on, based on the provided reference, is the current yield.
Understanding Current Yield
The current yield offers a snapshot of a bond's return based on its current market price. Here's how it's calculated:
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Definition: The current yield represents the annual coupon payment relative to the bond's current market price.
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Formula:
Current Yield = (Annual Coupon Payment / Market Price of Bond) -
Example: Suppose a bond has an annual coupon payment of $50 and it's currently trading at $1000. The current yield would be 5% ($50 / $1000 = 0.05 or 5%).
Key Aspects of Current Yield
- Easy to Calculate: It provides an easy and quick way to determine the bond’s immediate return based on price.
- Doesn't Factor Time: It doesn’t account for the bond's maturity date, so it doesn’t show the total expected return if held until maturity.
- Useful for Comparison: It's helpful for quickly comparing different bonds to see which ones offer the most yield at the current price.
Other Measures
It's important to note that there's another primary measure of bond return, the yield to maturity (YTM). The provided information focuses solely on current yield, and further research would be needed to explain how YTM is calculated.
Summary Table
| Measure | Description | Formula |
|---|---|---|
| Current Yield | The annual return on a bond based on its current price. | (Annual Coupon Payment / Market Price of Bond) |
