Current yield and pull to par

Yield return may be further decomposed into a current yield and a pull-to-par yield.

Suppose a bond has just been issued and has a long time to maturity. To a close approximation, its instantaneous return will be given by its coupon divided by the price at which it was bought. This quantity is called the current yield (also flat yield, interest yield, or running yield), and is given by

r_{current\ yield} = \frac{c}{p}

where $r$ is the current yield return, $c$ is the bond’s coupon, and $p$ is its current clean price (i.e. excluding accrued interest).

However, current yield is only a rough and ready measure of a bond’s return. As the bond approaches maturity, its price will converge towards par, and this will affect the yield. The effect is called pull to par or reduction of maturity. The size of this effect is given by the difference between the yield to maturity and the current yield, and may be regarded as the return due to capital gains or losses between the time the bound is bought and the time it matures. Therefore, a more accurate way to measure non-term structure return is to express it in terms of coupon return (running yield), plus return due to the passage of time (pull-to-par return). The pull-to-par return is given by the difference between the yield-to-maturity return and the current yield return:

r_{yield\ to\ maturity} = r_{current\ yield}+r_{pull\ to\ par}

FIA offers several options for calculation of yield returns:

NONE: Suitable for portfolios of zero-coupon or equity-type securities, where there is no yield return;
AGGREGATED: All returns from accrued interest are assigned to a single category, which measures the return from yield to maturity;
PULL_TO_PAR: Returns from accrued interest are split into current yield and pull to par yield, with the sum of the two returns equal to the yield to maturity return.

Use the CouponDecomposition flag in the configuration file to indicate which option is required. If this flag is not set, FIA uses the AGGREGATED setting.

The user has the option of supplying a yield to maturity for each record in the weights and returns file. If a yield to maturity is not provided, it is calculated automatically using a numerical iterative routine based on the yield curve linked to that security. However, note that if the curve does not reflect the security’s creditworthiness, the calculated yield can be substantially different to the actual market yield.