This metric answers the question of what percentage return the coupon payments generate from the amount invested today. If a bond with a 20% coupon trades at 95% of par value, the current yield is approximately 21%.
It is simpler than yield to maturity, but less comprehensive: current yield only accounts for the coupon and ignores the difference between the purchase price and par value that will be gained or lost at maturity. Therefore, for bonds trading significantly above or below par, it provides a distorted picture of the actual return.
The relationship between these three metrics depends on price. When purchased at par, coupon yield, current yield, and yield to maturity coincide. When purchased at a discount, current yield exceeds coupon yield, and yield to maturity exceeds both; when purchased at a premium, the opposite occurs.
Practical application is limited: current yield is useful for quick assessment of cash flow when regular income matters to the investor. For comparing different issues, yield to maturity is used instead.