Thecurrent yieldandyield to maturity (YTM)are two important metrics for bond investors. The current yield of a bond is a measure of the bondholder's return if the bond is purchased and held for one year (Dalton, & Forjan, 2022).Calculated by dividing the annual interest payment (coupon) by the current market price of the bond. A 10-year bond with an annual coupon rate of 4.7% sells for $890, the current yield is 5.28%. Yield of maturity explicitly measures the return to bondholders if the bond is held until its maturity date (Dalton, & Forjan, 2022).Calculating the yield to maturity assumes all coupon or interest payments can be reinvested at the same rate of return as the bond (Fernando,2024). The yield of maturity is 6.21%.

There are differences between current yield and yield of maturity. Current yield is a relatively simple calculation and gives a quick snapshot of the return based on the current market price. It does not consider the time value of money or the return of the principal at maturity. It also ignores the value of reinvestment coupon payment (Dalton, & Forjan, 2022). On the other hand, yield to maturity is a more comprehensive measure, taking into account the present value of all future cash flows. It considers both the coupon payments and the return of the principal at maturity, providing a more accurate representation of the total return.

The decision to purchase a bond could be influenced by these yields. Since the formula for current yield is based on the purchase pricerather than the par valueof a bond, it more accurately reflects the profitability of a bond, relative to other bonds on the market (Bloomenthal, 2022). Investors may use this metric for a quick comparison of different bonds or investment options. Yield to maturity is a more comprehensive measure that considers the overall return, including the impact of the bond's price in relation to its face value and the time value of money. It gives a better indication of the potential return if the bond is held until maturity (Bloomenthal, 2022). The choice between these two metrics depends on the investor's investment goals, risk tolerance, and time horizon.

Reference:

Dalton, J.F., & Forjan, J.M. (2022).Investment planning: concepts and strategies(3rd ed.). Money Education. ISBN: 9781946711113

Bloomenthal, A. (2022, October 12).Current Yield vs. Yield to Maturity. Investopedia.https://www.investopedia.com/ask/answers/072915/what-relationship-between-current-yield-and-yield-maturity-ytm.asp#toc-current-yield-of-bonds