how current yield is calculated
if an investor buys a 6 coupon rate bond for a discount of 900 the investor earns an annual interest income of 1 000 x 6 or 60 the current yield is 60 900 or 6 67 the 60 in annual interest is fixed regardless of the price paid for the bond on the other hand if an investor purchases a bond at a premium of 1 100 the current yield is 60 1 100 or 5 45 the investor paid more for the premium bond that pays the same dollar amount of interest therefore the current yield is lower current yield can also be calculated for stocks by taking the dividends received for a stock and dividing the amount by the stock s current market price as a financial theory general rule investors should expect higher returns for riskier investments therefore if two bonds have similar risk profiles investors should opt for the higher return producing offering factoring in yield to maturityyield to maturity ytm is the total return earned on a bond assuming that the bond owner holds the bond until the maturity date for example let s assume that the 6 coupon rate bond purchased for a discount of 900 will mature in the 10 years to calculate ytm an investor makes an assumption about a discount rate so that the future principal and interest payments are discounted to present value in this example the investor receives 60 in annual interest payments for 10 years at maturity the owner receives the par value of 1 000 and the investor recognizes a 100 capital gain the present value of the interest payments and the capital gain are added to compute the bond s ytm if the bond is purchased at a premium the ytm calculation includes a capital loss when the bond matures at par value 