What is calculated by taking the annual interest paid by a bond and dividing it by the purchase price of the bond?

The current yield is calculated by taking the annual interest that a bond pays, which is often referred to as the coupon payment, and dividing it by the bond's current market price or purchase price. This metric gives investors a snapshot of the income generated by the bond as a percentage of its price, helping them assess the bond's attractiveness in relation to its market value.

For example, if a bond has a coupon payment of $50 annually and is purchased for $1,000, the current yield would be $50 divided by $1,000, resulting in a current yield of 5%. This measure is particularly useful for investors looking to understand the yield they are earning on their investment relative to what they actually paid for the bond, rather than its face value.

In distinction to the current yield, other metrics like nominal yield, yield to maturity, and coupon rate reflect different aspects of a bond's return or payment structure. The nominal yield refers to the bond's stated interest rate, the yield to maturity considers all future cash flows and the time value of money until the bond matures, and the coupon rate simply expresses the annual interest payment as a percentage of the bond's face value. Understanding these different yield expressions helps bond investors make informed decisions