Is current yield ever misleading? When should I NOT rely on it?

Current yield is the quickest bond income metric but it has significant blind spots. Understanding its limitations is crucial for the CFA exam.

Where current yield fails:

1. Deep discount or premium bonds

A zero-coupon bond has a current yield of 0% — yet it earns a substantial return through price appreciation. Similarly, a bond trading at 130% of par has a high current yield but faces guaranteed capital loss as it converges to par.

2. Short remaining maturity

A bond maturing in 6 months with a 10% coupon trading at $1,050 has a current yield of $100/$1,050 = 9.52%. But you'll lose $50 at maturity (converges to par), making the actual annualized return much lower.

3. Callable bonds

If a bond is likely to be called soon, the current yield overstates expected income because you may only receive coupons for a short period before the bond is redeemed.

4. Floating-rate notes

Current yield reflects the current coupon, which resets periodically. It tells you nothing about future income.

Better alternatives by situation:

Yield to Worst (YTW):

For callable bonds, calculate the yield for every possible call date and use the lowest — that's the yield to worst. It gives the most conservative estimate.

Practical comparison:

Marcus is evaluating two bonds:

By current yield alone, Apex looks far superior. But YTM reveals that Zenith actually offers better total return because its capital gain ($120 at maturity) more than compensates for the lower coupons.

Exam tip: Whenever a question gives you a bond priced significantly away from par, current yield will be misleading. Default to YTM for total return comparisons.

Practice yield measure comparisons in our CFA Level I question bank.