Simply put: yes, you will. The beauty of a fixed-income security is that the investor can expect to receive a certain amount of cash, provided the bond or debt instrument is held until maturity (and its issuer does not default). Most bonds pay interest semi-annually, which means you receive two payments each year. So with a $1,000 bond that has a 10% semi-annual coupon, you would receive $50 (5%*$1,000) twice a year for the next 10 years.

Most investors, however, are concerned not with the coupon payment, but with the bond yield, which is a measure of the income generated by a bond, calculated as the interest divided by the price. So if your bond is selling at $1,000, or par, the coupon payment is equal to the yield, which in this case is 10%. But bond prices are affected by, among other things, the interest offered by other income-producing bonds. As such, bond prices fluctuate, and in turn, so do bond yields. You can read more about the factors affecting bond prices in the tutorials "Bond Basics" and "Advanced Bond Concepts".

To further illustrate the difference between yield and coupon payments, let's consider your $1,000 bond with a 10% coupon and its 10% yield ($100/$1,000). Now, if the market price fluctuated and valued your bond to be worth $800, your yield would now be 12.5% ($100/$800), but the $50 semi-annual coupon payments would not change. Conversely, if the bond price were to shoot up to $1,250, your yield would decrease to 8% ($100/$1,250), but again, you would still receive the same $50 semi-annual coupon payments.


Filed Under:

comments powered by Disqus
Trading Center