Current yield, simple yield and yield conventions

What are current yield and simple yield?

Both are quick, rough measures of return. Each divides an annual income figure by the flat price: the price without accrued interest.

Current yield uses the coupon alone.

$$y_{\text{current}} = \frac{\text{annual coupon}}{\text{flat price}}$$

It ignores the time value of money, the frequency of coupons, and the gain or loss when the bond is redeemed at par. A discount bond has a gain to come, a premium bond a loss, and current yield sees neither.

Simple yield fixes that crudely. It spreads the gain or loss to par evenly over the years left, like straight-line depreciation, and adds it to the coupon. It is used mainly to quote Japanese government bonds.

$$y_{\text{simple}} = \frac{C + \dfrac{100 - P}{T}}{P}$$

$C$ is the annual coupon per 100 of par, $P$ the flat price and $T$ the years to maturity. A discount adds to the numerator; a premium subtracts from it.

Exam tip Both measures divide by the price you pay. Dividing by 100 is the classic slip.

What are street convention and true yield?

Bonds pay on scheduled dates, and some of those dates fall on weekends or holidays, when the payment moves to the next business day.

Yield quotes for a fixed-rate bondeach answers a slightly different question

• Income only or rough ignore compounding and timing
  • Current yield Use it coupon ÷ flat price
  • Simple yield Use it (coupon + straight-line gain or loss) ÷ flat price; JGB quotes
• Payment dates which day does the cash arrive
  • Street convention Memorize scheduled dates, weekends and holidays ignored
  • True yield Memorize actual dates; never higher than street
• Day count how the year is measured
  • Government equivalent yield Memorize 30/360 yield × 365/360, to compare with governments

Street convention yields assume every cash flow arrives on its scheduled date, ignoring weekends and holidays. It keeps price and yield calculations simple, and it is the usual quote.

True yield uses the actual payment dates. A payment pushed to Monday arrives later, so the present value falls and the yield with it. True yield is never higher than the street convention yield. The gap is typically a basis point or two, which is why true yield is rarely quoted.

Go deeper Why the gap is so small

A coupon moved by one or two days barely changes the present value of a bond that lasts years. Only the cash flows that land on weekends or holidays shift, and they shift by a day or two. The result is a difference of a basis point or two, too small to change a trade, so dealers quote street convention and move on.

What is the government equivalent yield?

Government bonds count the actual days between payments over the actual length of the year (actual/actual). Corporate bonds usually use a tidier 30/360 day count : 30-day months in a 360-day year. Putting a corporate yield beside a government yield without adjusting for this compares different measuring sticks.

Government equivalent yield restates a 30/360 yield on an actual/actual basis. A simple approximation multiplies by 365/360.

$$y_{\text{act/act}} \approx y_{30/360} \times \frac{365}{360}$$

Convention	Typically used for	Counts
Actual/actual	government bonds	real days in the period and in the year
30/360	corporate bonds	30-day months, 360-day year

Go deeper Where this adjustment matters

Spreads over governments, covered in the last lesson of this module, strip the benchmark out of a corporate yield to isolate the issuer’s credit and liquidity compensation. If the two yields use different day counts, a few basis points of the spread are just arithmetic. The government equivalent yield removes that noise. Effective annual rate, from the first lesson, is the other restatement worth knowing: it is simply periodicity 1.