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Coupon rate is the stated interest rate on a fixed income security.  It’s the yield as of the issue date.  The yield is calculated by summing the coupons for a given year, and then dividing that sum by the security’s face value.

For example, if a $1,000 bond issued on January 1 has coupons that pay $75 on June 30 and $75 December 31, then the bond’s yield is:

($75 + $75)/$1,000 = 15%

It’s important to remember that the 15% yield on this bond is the yield as of its issue date.  As interest rates rise and fall, the effective yield changes as the bond trades in the secondary markets.  The effective yield changes because the bond will be traded for more or less than its stated face amount of $1,000.  The calculation of exactly how much an investor will pay for the bond is a highly sophisticated yield-to-maturity calculation. 

In the most basic terms, if rates fall below 15%, investors will be willing to pay more than $1,000 for this bond because they can’t purchase new bonds with such a high coupon rate.  If rates rise, investors will only be willing to pay less than $1,000 for this bond because they can buy new bonds with a higher coupon rate.

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