What is the current yield of a bond calculated from?

The current yield of a bond is calculated using the annual interest payment, also known as the coupon payment, divided by the bond's current market price. This formula gives investors a measure of the income generated by the bond relative to its purchase price, reflecting the bond's yield based on current market conditions rather than just its face value.

This calculation is important because it allows investors to assess how attractive a bond is compared to others or alternative investments, especially in fluctuating markets where bond prices can change significantly. The market price reflects what investors are willing to pay for the bond at that moment, making this measure more relevant for decision-making than simply looking at par or face value.

Using the annual interest divided by par value does not account for the bond’s current market conditions, which is essential for determining its current yield and potential returns for investors considering buying or selling the bond in the market.