Current Yield and Coupon Rate

• Since a bond can be sold above par at a premium, at par, or below par at a discount, current yield as calculated could be smaller than coupon rate, equal to coupon rate or larger than coupon rate. The difference in calculation between current yield and coupon rate is that while current yield compares coupon payment to bond price at the time, coupon rate always match coupon payment with the fixed bond face value. Therefore, the only variable is bond price and when bond price equals to bond face value, current yield equals to coupon rate.
  
  

Yield to Maturity and Coupon Rate

• Based on the inverse relation between bond price and yield to maturity, when a bond is selling above the bond face value, yield to maturity moves lower than coupon rate, and when a bond is selling below the bond face value, yield to maturity moves higher than coupon rate. Only when a bond is selling at the bond face value, yield to maturity is equal to coupon rate.
  
  

Unequal Current Yield and Yield to Maturity

• For a premium bond, both current yield and yield to maturity are lower than coupon rate, and for a discount bond, both current yield and yield to maturity are higher than coupon rate. However, the two yields are not equal to each other. Yield to maturity is always less than current yield on a premium bond and greater than current yield on a discount bond, because yield to maturity takes into account face value amount as additional cash payment. According to materials from University at Albany, receiving face value principal from a premium bond is a loss in value, reducing the yield and receiving face value principal from a discount bond is a gain in value, raising the yield.
  
  

Equal Current Yield and Yield to Maturity

• Yield to maturity must equal to current yield only if a bond is selling at par. When selling at the face value of the principal amount, the return of principal at maturity generates neither addition gain nor loss and no yield adjustment is made, resulting in equal current yield and yield to maturity. Both yield to maturity and current yield are also equal to coupon rate.
  
  

Different Uses of Current Yield and Yield to Maturity

• Current yield is useful when investors purchase a bond and plan to hold it for only one year. If the bond price has changed by the time the bond is sold, current yield is adjusted to reflect the gain or loss from the changing bond price. Because current yield does not take into account any gain or loss from receiving back bond principal at maturity and the life of the bond, it is not the real annual rate of return expected to be earned on the bond if it is held until maturity. Yield to maturity equates coupon and principal payments to be received in the future to the present purchase cost and thus is the effective rate of return investors can expect from a bond investment.