What formula is used to calculate the Current Yield on Bonds?

The formula for calculating Current Yield on Bonds is derived from the relationship between the bond's annual interest payment and its current market price. Current Yield provides investors with a measure of the income generated from a bond relative to its market value, which is particularly useful for assessing the bond's performance in the market.

Using the Annual Cash Flow, which in the case of bonds typically refers to the annual interest payment, divided by the Current Market Price gives a clear representation of how much return an investor can expect from holding the bond at its current trading price. Multiplying this by 100 converts the ratio into a percentage, making it easier for investors to interpret and compare yields between different investments.

This formula highlights the essential concept of market conditions: as a bond's market price fluctuates, its yield changes, impacting investment decisions. Understanding Current Yield is crucial for assessing the attractiveness of a bond in an investment portfolio, particularly in varying interest rate environments.