Bond Current Yield Calculator

Face Value: dollars

Coupon Frequency:

Coupon Rate: %

Bond Price: dollars

1. What is the Bond Current Yield Calculator?

Definition: This calculator computes the coupon payment per period ($ C_p $), annual coupon ($ C_a $), and bond current yield ($ CY $), representing the periodic and annual coupon payments and the annual return from coupons relative to the bond’s market price.

Purpose: Helps investors evaluate a bond’s income-generating potential and cash flow characteristics based on its current market price, aiding investment decisions.

2. How Does the Calculator Work?

The calculator follows a three-step process to compute the results:

Formulas:

$ C_p = \frac{FV \times CR}{F} $

$ C_a = C_p \times F $

$ C_a = FV \times CR $

$ CY = \frac{C_a}{BP} \times 100 $

Where:

$ CY $: Bond Current Yield (%)
$ C_p $: Coupon Payment per Period (dollars)
$ C_a $: Annual Coupon (dollars)
$ FV $: Face Value (dollars)
$ CR $: Coupon Rate (decimal)
$ F $: Coupon Frequency (per year)
$ BP $: Bond Price (dollars)

Steps:

Step 1: Calculate coupon per period and annual coupon. Use $ C_p = \frac{FV \times CR}{F} $ and $ C_a = C_p \times F $ (or $ C_a = FV \times CR $).
Step 2: Determine bond price. Use the provided market price of the bond.
Step 3: Compute current yield. Apply $ CY = \frac{C_a}{BP} \times 100 $.

3. Importance of Bond Current Yield

Calculating these metrics is crucial for:

Income Assessment: $ CY $ shows the annual return from coupons relative to the bond’s market price, useful for income-focused investors.
Cash Flow Clarity: $ C_p $ and $ C_a $ quantify periodic and yearly coupon payments, aiding financial planning.
Investment Comparison: Allows comparison of bonds with different prices, coupon rates, and frequencies.

4. Using the Calculator

Example (Bond A): $ FV = \$1,000 $, $ F = 2 $, $ CR = 5\% $, $ BP = \$900 $:

Step 1:
- $ C_p = \frac{1,000 \times 0.05}{2} = \$25 $.
- $ C_a = 25 \times 2 = \$50 $ (or $ C_a = 1,000 \times 0.05 = \$50 $).
Step 2: $ BP = \$900 $.
Step 3: $ CY = \frac{50}{900} \times 100 = 5.56\% $.
Results: $ C_p = \$25 $, $ C_a = \$50 $, $ CY = 5.56\% $.

A current yield of 5.56% indicates a higher return than the coupon rate due to the bond trading at a discount.

Example 2: $ FV = \$1,000 $, $ F = 1 $, $ CR = 4\% $, $ BP = \$950 $:

Step 1:
- $ C_p = \frac{1,000 \times 0.04}{1} = \$40 $.
- $ C_a = 40 \times 1 = \$40 $ (or $ C_a = 1,000 \times 0.04 = \$40 $).
Step 2: $ BP = \$950 $.
Step 3: $ CY = \frac{40}{950} \times 100 = 4.21\% $.
Results: $ C_p = \$40 $, $ C_a = \$40 $, $ CY = 4.21\% $.

A 4.21% yield reflects a bond trading at a slight discount, offering a higher return than its coupon rate.

Example 3: $ FV = \$1,000 $, $ F = 4 $, $ CR = 6\% $, $ BP = \$1,050 $:

Step 1:
- $ C_p = \frac{1,000 \times 0.06}{4} = \$15 $.
- $ C_a = 15 \times 4 = \$60 $ (or $ C_a = 1,000 \times 0.06 = \$60 $).
Step 2: $ BP = \$1,050 $.
Step 3: $ CY = \frac{60}{1,050} \times 100 = 5.71\% $.
Results: $ C_p = \$15 $, $ C_a = \$60 $, $ CY = 5.71\% $.

A 5.71% yield is lower than the coupon rate due to the bond trading at a premium.

5. Frequently Asked Questions (FAQ)

Q: Why calculate coupon per period?
A: $ C_p $ shows the cash flow received each period, essential for understanding payment schedules, especially with non-annual frequencies.

Q: How does current yield differ from yield to maturity?
A: $ CY $ considers only annual coupon payments relative to the bond’s price, while yield to maturity includes all cash flows, including price changes at maturity.

Q: Can current yield be negative?
A: No, since $ C_a $ and $ BP $ are typically positive. Negative yields would imply invalid inputs or a zero-coupon bond.