Current Yield and Running Yield
A quick, rough measure of a bond's return that just divides its annual coupon by its current market price, ignoring maturity and price change entirely.
Current yield — also called running yield — is the simplest yield number attached to a bond: the annual coupon payment divided by the bond's current market price. A bond paying a $5 annual coupon and trading at $95 has a current yield of 5 / 95 ≈ 5.26%. It says nothing about how long the bond has left to run or what happens to the price by maturity, which is why it differs from yield to maturity: a bond trading below par (like this one) has a current yield lower than its yield to maturity, because YTM also captures the built-in gain of being repaid $100 at maturity for a $95 price today.
Traders still quote current yield because it is fast to compute in your head and gives an at-a-glance sense of income return, but it is a poor substitute for yield to maturity when comparing bonds of different maturities or prices, since it ignores the pull-to-par effect entirely.
Current yield = annual coupon ÷ current price — quick and intuitive, but unlike yield to maturity it ignores the capital gain or loss from a bond's price converging to par by maturity, so it systematically understates return on a discount bond and overstates it on a premium bond.
Practice in interviews
Further reading
- Fabozzi, Bond Markets, Analysis, and Strategies