Coupon Rate
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?
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.
What is the effective yield?
The return on a bond when the bondholder reinvests coupon payments at the same rate is known as the effective yield. In contrast to the nominal yield, which is the coupon rate, it is the overall yield that an investor receives. Effective yield, as opposed to nominal yield, essentially considers the impact of compounding on investment returns.