# How to Calculate Current Yield: Definition, Formula & Graph

Instructor: Lucinda Stanley

Lucinda has taught business and information technology and has a PhD in Education.

In this lesson you will learn about calculating current yield for stocks and bonds and how it can help you see what your return on investment will be. You will learn what current yield is, the formula to calculate it, and how to graph it.

## Current Yield: Managing your Investments

Do the promises in this flyer sound good? Are you thinking of investing in the bond or stock market? Great!

Wouldn't it be nice if there was some way you could see what the return on your investment will be in three months, a year, or five years?

Well, there is! You can calculate what is known as the current yield.

## What is Current Yield?

Current yield is a financial measure used to calculate the current value of bonds, or other investments that provide a fixed interest, meaning the interest rate will not change. Current yield may also be called bond yield or dividend yield.

Basically, what calculating the current yield will tell you is how much a bond is worth at the moment. You can use that information to plan out what that bond might be worth in three months, or a year, or five years. One thing to keep in mind is that current yield may not be terribly accurate as you plot into the future because prices can change quite a bit. What the current yield calculation can tell you is an approximate return on your investment (ROI).

Return on investment is how much income you are getting by holding onto that investment. If you bought a \$100 bond with an interest rate of 3%, you can expect to earn \$3 a year on that investment - that is your return. If you keep the bond for 3 years, you will earn \$9 (\$3 x 3 years). That seems pretty straight forward right? The tricky part comes when you decide to sell the bond. If the \$100 bond you bought 3 years ago is now selling for \$95 what was your actual return on investment? You sell the bond for \$95 plus you earned \$9 over 3 years, that gives you a return of \$4 (\$104 - 100) for the \$100 investment you made 3 years ago.

So the actual return will depend on how long you hold the bond and how much you can sell it for. Calculating current yield can help you see what your return on investment might actually look like. Let's take a look at how the current yield is calculated.

## Calculating the Current Yield

The formula to calculate the current yield is pretty simple. You take the annual income (the coupon, or dividend, or interest) of your investment and divide that by the current price.

Annual Income / Current Price

There are two steps for this calculation:

• First you calculate the annual interest payment: you take the face value of the investment times the interest rate.

For example, if we had an investment with a face value worth \$100 and an annual interest rate of 3% the annual interest payment would be \$3.00 (\$100 x .03).

• Second, once you have the annual interest payment, you calculate the current yield by dividing it by the current price of the investment, meaning what someone buying the investment today would pay. You can find the current price of your investment by checking with various stock exchanges, bond markets, or the US Treasury Department.

For example, if the current price of our investment is now \$95, we would divide \$3 by \$95, which would give us a current yield of .03157 or 3.16%.

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