A bond's coupon rate has a large effect on its market price because it dictates the amount of income the bond generates per year. The coupon rate is the bond's annual interest rate, sometimes simply called its coupon. This rate is expressed as a percentage of the bond's par, or face value, which is generally $100 or $1,000. For example, a $1,000 bond that generates two interest payments of $25 each year has a coupon rate of $25 * 2 / $1,000, or 5%.
Coupon rates are largely influenced by the national interest rates controlled by the government. This means that if the minimum interest rate is set at 6%, no new bonds may be issued with coupon rates below this level. However, preexisting bonds with coupon rates higher or lower than 6%, such as the one in the above example, can still be bought and sold on the secondary market.
Most bonds have fixed coupon rates, meaning that no matter what the national interest rate may be or how much the bond's market price fluctuates, the annual coupon payments remain stable. When new bonds are issued with higher interest rates, they are automatically more valuable to investors because they pay more interest per year compared to preexisting bonds. Given the choice between two $1,000 bonds selling at the same price, one that pays 6% and one that pays 4%, the former is clearly the wiser option.
When interest rates rise, the value of existing bonds is decreased relative to newly issued bonds. To compensate for their diminished value, the market price of bonds with lower coupon rates is decreased. Conversely, when interest rates go down, the market price of preexisting bonds with higher coupon rates goes up.
Because each bond returns its full par value to the bondholder upon maturity, investors can increase bonds' total yield by purchasing them at belowpar prices, called discount. A $1,000 bond purchased for $800 generates coupon payments each year but also yields a $200 profit upon maturity, unlike a bond purchased at par.

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