Legal Definitions - current yield

Current Yield refers to a financial metric that calculates the annual income an investment generates, expressed as a percentage of its current market price. It helps investors understand the immediate return they would receive if they purchased the investment today, based on its current value and its expected annual income payments, such as interest for bonds or dividends for stocks.

Here are some examples to illustrate current yield:

• Imagine a company bond that was originally issued with a face value of $1,000 and pays a fixed annual interest of $60. If the bond's market price has recently dropped to $900 due to changes in interest rates, its current yield would be calculated as $60 (annual interest) divided by $900 (current market price), resulting in approximately 6.67%. This example demonstrates that an investor buying the bond today for $900 would receive a 6.67% return on their investment annually, based on the current market price, even though the original coupon rate was 6% of the face value.

• Consider a publicly traded stock that consistently pays an annual dividend of $1.50 per share. If the stock's market price is currently $30 per share, its current yield would be $1.50 (annual dividend) divided by $30 (current market price), which equals 5%. This illustrates the immediate cash return an investor would receive relative to the price they would pay to acquire the stock today, providing a snapshot of its income-generating potential at its present valuation.

• Suppose an investor is looking at a preferred stock that pays a fixed annual dividend of $2.50 per share. If the preferred stock is currently trading on the market for $45 per share, its current yield would be $2.50 (annual dividend) divided by $45 (current market price), which is approximately 5.56%. This example highlights how current yield provides a clear picture of the income stream an investor can expect relative to the current cost of purchasing the preferred shares, which can be particularly useful for income-focused investors.