What it means
Bonds pay interest, called the coupon, as a fixed amount set when they are issued. A bond with a $1,000 face value and a 5% coupon pays $50 a year, but its market price moves up and down, so the return a new buyer receives depends on what they actually pay.
Running yield links the two by dividing the annual coupon by the current price. If the bond trades at a discount to face value, the running yield is higher than the coupon rate, and if it trades at a premium, the running yield is lower.
The measure is simple and gives a fast comparison of the income from different bonds. It has an important limit: it ignores what happens at maturity.
A bond bought at $950 will be repaid at $1,000, which adds to the investor's total return, but running yield counts only the interest. For a full picture investors use yield to maturity, which includes the gain or loss at redemption and the timing of all the payments.
Running yield is especially common in the UK gilt and corporate bond markets, where it is quoted next to the redemption yield. Treasury teams and income-focused investors use it to see how much cash a portfolio produces each year relative to what they have invested.
When using the measure, keep the price basis consistent. Many professionals use the clean price (the price without accrued interest), so check which one applies before comparing figures.
Finance teams also use the idea when reviewing bond funds and portfolios. The weighted average running yield of all the bonds in a portfolio shows how much annual income the holdings are producing on their current market value, which is helpful when budgeting for cash needs such as interest payments or distributions.
In practice
Real-world examples.
Example
A company treasurer is choosing between two bonds for surplus cash. One has a 4% coupon and trades at $980, giving a running yield of about 4.08%, while the other has a 6% coupon and trades at $1,100, giving about 5.45%.
Example
A retiree builds a bond portfolio to provide income. She compares running yields to see which holdings produce the most annual cash for every dollar invested, then checks the credit quality of the higher-yielding ones before buying.
Example
A pension fund manager reviews a bond that has fallen in price because of rising interest rates. Its running yield has increased, but the manager also checks yield to maturity to see the full return.
Formula
Calculation
Running yield = Annual coupon payment / Current market price x 100.
Take a bond with a $1,000 face value and a 5% coupon, so the annual coupon is $1,000 x 0.05 = $50. If the bond's market price is $950, the running yield is $50 / $950 = 0.05263, or 5.26%. If the price rises to $1,050, the running yield falls to $50 / $1,050 = 0.04762, or 4.76%, even though the coupon is unchanged.Case study
Seen in the real world.
Northgate Foods is an entirely fictional manufacturer that invests $2,000,000 of spare cash in corporate bonds. In this illustrative story, the finance manager is comparing a 3% coupon bond trading at a premium with a 4% coupon bond trading at a discount.
The first bond has a $1,000 face value and trades at $1,040, giving a running yield of $30 / $1,040, or 2.88%. The second trades at $960 and gives $40 / $960, or 4.17%.
The manager chooses the second bond for income but also notes that the discount bond will be repaid at face value, which adds to the return. The illustrative lesson is that running yield is a quick screen, and yield to maturity completes the picture. He records both figures side by side in the investment paper for the board, so that directors can see that the higher income comes with a slightly longer maturity and a lower credit rating.
Watch out
Common mistakes.
- Confusing the coupon rate with running yield, when the coupon is based on face value and running yield is based on market price.
- Assuming running yield is the total return, when it ignores the gain or loss at redemption.
- Comparing running yields across bonds with very different maturities or risk levels as if they were equal.
Questions
People also ask.
How is running yield different from yield to maturity?
Running yield counts only the annual interest against the price, while yield to maturity also includes the gain or loss at redemption and the timing of payments.
Why does running yield change when the coupon does not?
The market price moves with interest rates and credit risk, and the same coupon divided by a different price gives a different yield.
Is running yield the same as current yield?
Yes, the two terms usually mean the same calculation.
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