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Current Yield
Current yield is defined as the annual coupon interest received on the market price.
Current Yield =
For example, the current market price of a bond is Rs.843 and the coupon interest payment received on it is Rs.70. The Current yield of the bond is:
Current Yield = 70/ 843 = 0.83, which can also be expressed as 8.3%.
Current yield for a bond selling at par would be equal to the coupon interest rate. Current yield of a bond selling at a premium (discount) would be less (greater) than the coupon interest rate.
An important drawback of current yield is that it considers only coupon income as a source of return to the investor, ignoring interest and capital gains (loss) that would also accrue.
Yield to Maturity (YTM)
It is the rate of return earned by an investor who purchases a bond and holds it till maturity. YTM is the discount rate which equals the present value of promised cash flows to the current market price/purchase price.
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