Traditional Yield Measures for Bonds

b. compute and interpret the traditional yield measures for fixed-rate bonds, and
explain their limitations and assumptions;




Current yield

To obtain the current yield, the annual coupon interest is divided by the market price.

Yield to maturity

The yield on any investment is the interest rate that will make the present value of the cash flows from the investment equal to the price of the investment.

Yield to call

For bonds that may be called prior to the stated maturity date another yield measure is commonly quoted: it is the yield to call.

To compute the yield to call, the cash flows that occur if the issue is called on its first call date are used.

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