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The current yield is 5.65 percent and the effective annual yield is 5.73 percent.
What is Current Yield & Effective Annual Yield?
Current yield is the annual return that a bond purchaser would earn, if he or she bought the bond at its current market price and held it for one year. However, current yield does not measure the total return anticipated on a bond, if it is held until its maturity date. Effective annual yield is the return earned by bondholders, assuming that they reinvest the coupon payments they receive. The effective annual yield takes into account the effects of compounding.
Given:
Face value = $1,000
Annual coupon payment = ?
Coupon rate: 5.65%
Coupon frequency: Semi-annual.
Find:
Annual coupon payment = Coupon rate * Face value
= 0.0565 * $1000
= $56.5
Current Yield = Annual Coupon Payment / Current Market Price
= $56.5 / $1,000
= 5.65 %
Effective annual yield = [1 + (r/n)]^n – 1
=(1 + 5.65% / 2)² - 1
= 5.73%
Learn more about Current Yield and effective annual yield on:
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