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Current Yield | Calculation (Formula, Examples) | Calculator - YouTube
Channel: WallStreetMojo
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hello friends welcome to the channel of
Wallstreetmojo today we are going to
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discuss a tutor on current yield now
what is exactly current yield see
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current yield is an investment of annual
income that is interest or dividend
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divided by the current price of the
security and this measures looks at the
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current price of the bond instead of the
face value so the current yield
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represents the return on the investors
would expect if the owner purchased the
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bond and held it for a year but current
yield is not actual return foreign
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investors who receives if he holds bond
until maturity so current yield is all
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the annual cash flows divided by the
market price per share
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breaking down the current yield current
yield is the most often applied to bond
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investments which are security that I
issued to an investor's at par value I
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mean or the face value of let's say a
$1000 bond carries a
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coupon amount of interest that has
stated on the face value face of the
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bond certificate and bonds are traded
between investors since the market price
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of the bond changes and investors may
purchase a bond at a discount which is
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less than the power value or a premium
and the purchase price of the bond of XT
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current yield now let's understand how
to how the current yield is is this
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calculated if an investor let's say he
buys a 6% coupon rate bond for a
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discount of let's say of $900 the investor earns how much 1000
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x 6 because 1000 is the face value into 6% is a
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coupon rate so what is a coupon $60 so what is the current yield
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60 divided by the market price what
was your market price nine hundred so
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60 divided by 900 900 which gives us
6.67% so over here
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the $60 in annual interest is fixed
regardless of the price paid for the
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bond if on the other hand an investor
purchases a bond at a premium of 1100
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the current price will become 60
divided by 1100 which will
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give us 5.45% so the investor investor is paid more for
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the premium bond that pays the same
dollar
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of the interest so the current yield is
lower the current yield can also be
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calculated for stocks by taking dividend
received for a stock and divided by the
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amount by the stocks current market
price now what is YTM yield to maturity
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it is the total return on on a bond
assuming that the bond owner holds the
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bond until the maturity date assume for
an example that you know 6% coupon rate
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of bond purchase for $900 which matures
in 10 years now to calculate the YTM and
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investor needs to make an assumptions
about the discount rate so that the
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future principal and interest payments
are discounted at the present value in
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a previous example itself if the
investor received 60 in the annual
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interest payment for 10 years at
maturity in 10 years the owner receives
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the par value of $1,000 and the investor
recognizes 100 as the capital gain so
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the present value of the interest
payments and the capital gain are added
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to compute the bonds YTM now if the bond
is purchased at premium the YTM
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calculation includes the capital loss
and when the bond matures at the par
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value now the current yield formula is a
different sort of a formula because it
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does not calculate the return on the
original price rather it calculates the
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return on the current price so now let's
have a look at the current yield formula
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in in the let's have a look at the formula
see the current yield is equal to the
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annual coupon see over here you can
instead of annual coupon you can also
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use the discount okay so will write
annual coupon divided by the current bond
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price okay so this is our formula now
let's take a current yield formula a example a
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practical example let's say there's a
company whose name is Betty okay
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the Betty has invested in two bonds the
original price of the two bonds were the
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price of 2 bonds let's say bond A and
bond B so the original price I'm just
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writing price over here was 1000 and
1500 the risk for both the bonds is
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similar okay the annual coupon for each
of these bonds
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are the annual coupon just writing
annual Cooper will be which will be
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based on a percentage so let's say the
annual coupon is 150 dollars over here
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and 180 dollars respectively the current
prices of this bond are 1200 this was
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the original price let me just write
original price this is your current
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price so the current price is 1200 and
1800 okay
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find out the Bond yield and current yield
for each of this bond and on the basis
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of the yield which bond Betty
should choose to invest so let's find
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out the bond yield first the bond yield
for the first bond let's write over here
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bond yield so the for the first bond
that is A will be how much the annual
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coupon divided by the current market
original price actually that is 1000 and
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you can do just control R because it
will follow the same formula so will
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get 15% and 12% okay so
now will calculate the current this was
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the bond yield basically now will
calculate the current yield of the bond
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so we have been given the I mean the
current prices and the same annual
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coupons will be applied so this was the
bond yield now let's calculate the
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current yield the current yield is going
to be the coupon divided by the current
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price and do control R there we have
our answer 13% and 10%
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that is close enough to 12.5 and 10% so on the basis of the yield but
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he should choose to basically invest in
the first bond that is the current yield
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having 12.5% bond yield of 15% since both of these bonds are similar in
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terms of risk we can easily say that the
first bond will be best among the two
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okay let's get into the nitty-gritty of
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the exploration part of the current yieldof formula no matter at
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what the
original price of the bond here is the
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current yield formula will only
calculate the return on the current
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price not on the original price okay be
very sure about that that's why it's not
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called
bond yield so in the case of the bond
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yield we calculate the return on the
original price look at that we have
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calculated on key 8 that is our
original price got it so however in the
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case we will only consider the current
price while calculating the return for
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example let's say that the investors
have bought a bond let's say at a price
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of 120 dollars and the bond promises a
return a 10% return okay
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now the annual coupon this is the return
we bought at okay and let's say the
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coupon the coupon is let's say 12
dollars so how the current price will be
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close enough to let's say let's say take
it 100so the bond yield over here
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is going to be 10 right it's going to
be 10 the bond price is going to be
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12 / 120 that's going to be
10% this is going to be our bond yield
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but the yield would be actually 12% the
current yield is going to be 12% that is
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is equal to 12 divided by 100 you can
see the difference okay
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so what is the use of the yield for an
investor high risk should result in
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higher returns that's why whenever we
look at multiple investments we need to
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multiple ratios to judge worthiness of
each investments in regards to bond
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investments investors look at quite a
few ratios like bond yield yield to
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maturity yield call and so on and so
forth
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the current yield of a bond is
specifically used to see how to risk
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investments turn out in the same
measuring grid so investors also will
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always look for the premium for taking
higher risk if it so happens that the
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investors have the option to choose one
from the two one from the to high risk
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bonds investments then the investor will
only choose the one that pays more
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return and that's why it is being used
and in and in such in
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such an important indicator okay now
let's
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look at the current yield calculator so
you can quickly get into the
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nitty-gritty and quickly check upon
various situations and get to the answer
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this is our current yield calculator
let's say if we put 100 as the coupon
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and the bond price as 1,000 so your
current yield is how much 10%
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remember that is always an inverse
relationship between the interest rate
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and the price so I'll just quickly get
you there the concept of interest rate
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that is the interest rate and the price
of the bond so remember this one thing
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that there will be always be a inverse
relationship between the interest rate
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in the price so if the interest rate
goes up the price will go down okay
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let's say in interest rate is 10 percent
and the price is 1,000
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so if the interest rate goes to 9
percent the price will shoot up let's
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say for an example 1100 if it goes to 11
percent then this will shoot up to 900
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just an example this is how the inverse
relationship will go because it's as
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simple that if an investor's have ever
bought a bond let's say for a 10%
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interest rate and at a price of 1000 now
if the interest rate turns out to be 9
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percent okay if the interest rate turns
out to be 9 percent for an outside
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investor it will be like why would I
take a bond at 9%
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so for 4 less it for the lesser person
date you have you will have to pay a
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more price so always remember there will
be an inverse relationship between the
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interest rate and price I hope you have
got a really good concept in your in
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your brain regarding the bond yield and
the current yield thank you everyone
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