CONVENTIONAL YIELD MEASURES
Related to the price of a bond is its yield. The price of a bond is calculated from the cash flows and the required yield. The yield of a bond is calculated from the cash flows and the market price plus accrued interest. In this section, we discuss various yield measures and their meaning for evaluating the relative attractiveness of a bond.
There are three bond yield measures commonly quoted by dealers and used by portfolio managers: (1) current yield, (2) yield to maturity, and (3) yield to call. In our illustrations below we assume that the next coupon payment is six months from now and therefore there is no accrued interest.
Current Yield
Current yield relates the annual coupon interest to the market price. The formula for the current yield is
For example, the current yield for a 15-year, 7% coupon bond with a par value of $1,000 selling for $769.40 is 9.10%, as shown:
The current yield calculation takes into account only the coupon interest and no other source of return that will affect an investor’s yield. No consideration is given to the capital gain that the investor will realize when a bond is purchased at a discount and held to maturity; nor is there any recognition of the capital loss that the investor will realize if a bond purchased ...
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