A:

A bond's coupon rate is the rate of interest it pays annually, while its yield is the rate of return it generates. A bond's coupon rate is expressed as a percentage of its par value. The par value is simply the face value of the bond, or the value of the bond as stated by the issuing entity. Thus, a \$1,000 bond with a coupon rate of 6% pays \$60 in interest annually.

Coupon rates are largely influenced by the interest rates set by the government. Therefore, if the government increases the minimum interest rate to 6%, then any pre-existing bonds with coupon rates below 6% lose value. Anyone looking to sell pre-existing bonds must reduce their market price to compensate investors for the bonds' lower coupon payments relative to the newly issued bonds. To buy a bond at a premium means to purchase it for more than its par value. To purchase a bond at a discount means paying less than par value. Regardless of purchase price, coupon payments remain the same.

A bond's yield can be measured in a few different ways. Current yield compares the coupon rate to the current market price of the bond. Therefore, if a \$1,000 bond with a 6% coupon rate sells for \$1,000, then the current yield is also 6%. However, because the market price of bonds can fluctuate, it may be possible to purchase this bond for a price that is above or below \$1,000. If this same bond is purchased for \$800, then the current yield becomes 7.5% because the \$60 annual coupon payments represent a larger share of the purchase price.

A more comprehensive measure of a bond's rate of return is its yield to maturity. Since it is possible to generate profit or loss by purchasing bonds below or above par, this yield calculation takes into account the effect of the purchase price on the total rate of return. If a bond's purchase price is equal to its par value, then the coupon rate, current yield and yield to maturity are the same.

RELATED FAQS
1. ### When is a bond's coupon rate and yield to maturity the same?

Find out when a bond's yield to maturity is equal to its coupon rate, and learn about the components of bonds and how they ... Read Answer >>

Find out what it means when a bond has a coupon rate of zero and how a bond's coupon rate and par value affect its selling ... Read Answer >>
3. ### What is the difference between yield to maturity and the coupon rate?

A bond's coupon rate is the actual amount of interest income earned on the bond each year based on its face value. Read Answer >>
4. ### How can I calculate a bond's coupon rate in Excel?

Find out how to use Microsoft Excel to calculate the coupon rate of a bond using its par value and the amount and frequency ... Read Answer >>
5. ### Why do interest rates have an inverse relationship with bond prices?

At first glance, the inverse relationship between interest rates and bond prices seems somewhat illogical, but upon closer ... Read Answer >>
Related Articles
1. Investing

### Understanding Bond Prices and Yields

Understanding this relationship can help an investor in any market.

### Calculate PV of different bond type with Excel

To determine the value of a bond today — for a fixed principal (par value) to be repaid in the future — we can use an Excel spreadsheet.
3. Managing Wealth

### How Bond Prices and Yields Work

Understanding bond prices and yields can help any investor in any market.
4. Investing

### 4 basic things to know about bonds

Learn the basic lingo of bonds to unveil familiar market dynamics and open to the door to becoming a competent bond investor.
5. Investing

### 5 Reasons to Invest in Municipal Bonds When the Fed Hikes Rates

Discover five reasons why investing in municipal bonds after the Fed hikes interest rates, and not before, can be a great way to boost investment income.

### How Rising Rates Impact Bond Mutual Funds

The interest rate increase by the Fed was one of the most widely anticipated in history. Here's what it means for bond mutual funds.
RELATED TERMS
1. ### Bond Valuation

Bond valuation is a technique for determining the theoretical ...
2. ### Current Coupon Bond

A bond with a coupon rate that is within 0.5\% of the current ...
3. ### Zero-Coupon Bond

A zero-coupon bond is a debt security that doesn't pay interest ...
4. ### Required Yield

Required yield is the return a bond must offer in order for the ...
5. ### Discount Bond

A discount bond is a bond that is issued for less than its par ...
6. ### Below Par

Below par is a term describing a bond whose market price is below ...
Hot Definitions
1. ### Yield Curve

A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
2. ### Portfolio

A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
3. ### Gross Profit

Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
4. ### Diversification

Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
5. ### Intrinsic Value

Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
6. ### Current Assets

Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...