What Is Adjusted Current Yield?
Adjusted current yield modifies the current yield by adding the annualised gain or loss from the bond's price moving toward par as maturity approaches. It corrects the main flaw in current yield, which ignores that a discount bond gains and a premium bond loses as it ages.
A bond bought at 90 will be worth 100 at maturity. Current yield ignores that entirely; adjusted current yield puts it back, which is the whole point of the measure.
How it works
Start with current yield — the annual coupon divided by the current market price, which measures income against what you paid.
Then add the annualised pull to par. A bond at 90 with five years left gains roughly 10 over that period — about 2 a year — which is real return the current yield omits.
And subtract it for a premium bond. One bought at 110 loses 10 over its remaining life, which is a certain loss that current yield presents as though it did not exist.
Why the omission matters so much
High-coupon bonds trade at premiums. A bond paying 8% when the market wants 4% will trade well above par, and its current yield looks generous.
That generous income is partly your own capital returning. You paid 110 for something that pays 100 back, so a portion of every coupon is compensating you for a loss that is already certain.
Which is why screening bonds by current yield selects badly. The highest current yields belong disproportionately to premium bonds whose true return is materially lower.
A worked example
A bond with a 6% coupon, five years to maturity, trading at 110.
Current yield: 6 divided by 110 = 5.45%. That is the figure most screens display.
The pull to par is a loss of 10 over five years — about 2 a year, or roughly 1.8% against the 110 price.
Adjusted current yield: about 3.6%. Barely two thirds of the headline figure, and the gap is certain rather than a projection. Yield to maturity on this bond would land near a similar number.
How it sits between the two standard measures
Current yield is the simplest and the least complete. Income against price, nothing else, and it is accurate only for a bond trading exactly at par.
Yield to maturity is the most complete and carries an assumption. It discounts every cash flow properly and assumes each coupon is reinvested at the same yield — which rarely happens.
Adjusted current yield sits between them. It captures the certain capital effect without importing a reinvestment assumption, using straight-line amortisation rather than proper discounting.
Which makes it an approximation with an honest error. It is slightly wrong in a known direction and does not pretend to a precision it lacks, where yield to maturity is exactly right about a scenario that usually does not occur.
The original data
This site’s thirty-year fee measurement: 5 basis points costs 1.5% of the final balance, 20 costs 5.8%, 75 costs 20.2%, 150 costs 36.5%.
The amortisation of a premium works the same way — a certain, recurring reduction that a headline yield figure does not display, compounding into a large difference in realised return over a bond’s life.
And a round trip costs 0.0098 on this site’s series, about 2% of the median bar range of 0.493. For a bond investor picking between issues with yields a few tenths of a percent apart, trading costs and the premium adjustment both matter more than the difference being chased.
Where the tax treatment complicates it
Premium amortisation is often deductible. In many jurisdictions the loss on a premium bond can offset the coupon income, which softens the after-tax effect considerably.
And discount accretion is frequently taxed as income rather than as a capital gain, which works the other way on a discount bond.
So the after-tax ranking can differ from the pre-tax one, and for a taxable account the adjusted yield is a starting point rather than an answer.
Inside a tax-sheltered account none of that applies, and the adjusted figure is a clean comparison — which is one more reason the same bond can be the right holding in one account and the wrong one in another.
Why bonds trade away from par at all
A bond’s coupon is fixed at issue and the market’s required return is not. When rates fall after issuance, an existing bond paying above the new market rate becomes more valuable, and its price rises above par until its return matches what a new bond offers.
The mechanism is arbitrage rather than sentiment. Nobody would buy a new bond paying 4% if an identical old one paying 6% were available at the same price, so the old one is bid up until the two are equivalent.
And the premium is exactly the present value of the excess coupon. Paying 110 for a bond that redeems at 100 is buying an income stream worth 10 more than the market rate provides, priced correctly.
Which is why the amortisation is not a loss in any meaningful sense. You paid for the extra income and you receive it; the adjusted yield simply reports the net of those two facts rather than one of them.
When it fails
The characteristic failure is screening a bond list by current yield. An investor sorts by yield, picks the highest, and systematically selects premium bonds whose stated income is partly the return of their own capital. Every one of those positions delivers less than advertised, and the shortfall is not a risk that might not materialise — it is arithmetic fixed at the moment of purchase. The screen worked perfectly and ranked by a number that does not measure return.
A second failure is using straight-line amortisation on a long bond, where the approximation drifts from the properly discounted figure.
A third is ignoring call features. A premium bond that is callable may amortise to the call price on an earlier date.
A fourth is applying it to a floating-rate note, where the coupon itself changes and the logic does not hold.
And a fifth is treating any yield as a promise. All of them assume the issuer pays, which is a credit question none of these measures addresses.
Related
Current yield covers the measure this corrects. Yield to maturity covers the complete calculation and its assumption. And coupon yield covers the stated rate all of these start from.
Current yield is the figure most often quoted and the least complete. It measures income against price and ignores the one thing you know for certain about a bond — that it redeems at par on a stated date. This adjustment puts that certainty back in.
— Michael Whitman
This page is educational, not financial advice. Test every idea on your own charts before risking money.