Coupon Rate


Coupon Rate
Source: Tavaga

Coupon rate is the interest rate that the issuer of a bond agrees to pay to the bondholder periodically. The coupon rate can be either fixed or variable, and is a percentage of the principal value invested by the bondholder.

How to calculate coupon rate?

Source: Tavaga

For ex – A 7 percent-annual bond of a company with a face value of Rs 10,000 and with ten years to maturity (trading at say, 7.6 percent YTM) will pay a coupon worth Rs 700 on a specified date each year. 

If it was a semi-annual bond, the payment of coupons would be done twice a year, and assuming it is the same coupon rate; the absolute disbursement will amount to two coupons of Rs 350 each.

What is the difference between a market rate and coupon rate?

Market rate changes as per the movements and events in the environment. It can change drastically. It is very volatile, whereas the coupon rate is not volatile. It is fixed and related to the face value of the bond.

Coupon rate is the interest rate that the issuer of a bond agrees to pay to the bondholder periodically. The coupon rate can be either fixed or variable, and is a percentage of the principal value invested by the bondholder.

Example

A 7 percent-annual bond of a company with a face-value of Rs 10,000 and with 10 years to maturity (trading at say, 7.6 percent YTM), will pay a coupon worth Rs 700 on a specified date each year. 

If it was a semi-annual bond, the payment of coupons would be done twice a year, and assuming it is the same coupon rate, the absolute disbursement will amount to two coupons of Rs 350 each.