WallStreetMojo

WallStreetMojo

WallStreetMojo

MENUMENU
  • Free Tutorials
  • Certification Courses
  • 250+ Courses All In One Bundle
  • Login
Home » Risk Management Tutorials » Fixed Income Tutorials » Coupon vs Yield

Coupon vs Yield

Difference Between Coupon and Yield

Coupon refers to the amount which is paid as the return on the investment to the holder of the bond by bond issuer which remains unaffected by the fluctuations in purchase price whereas, yield refers to the interest rate on bond that is calculated on basis of the coupon payment of the bond as well as it current market price assuming bond is held till maturity and thus changes with the change in the bond’s market price.

What is Coupon Rate?

Whenever a bondholder decides to put his money on a bond, he needs to look at certain parts that make up a bond. A bond has a face value, which is the amount the bondholder will receive at the time of maturity from the issuer of the bond. The coupon rate on the bond is calculated on the basis of the face value of the bond.

For example, suppose the face value of an XYZ bond is $1000, and the coupon payment for the bond is $20 semi-annually, then on an annual basis, the total coupon that will be received by the investor will be $40. The way the coupon rate is calculated is by dividing the annual coupon payment by the face value of the bond. In this case, the coupon rate for the bond will be $40/$1000, which is a 4% annual rate.

It can be paid quarterly, semi-annually, or yearly depending on the bond. Irrespective of the change in the price of a bond, the coupon rate will remain fixed for the life of the bond.

Popular Course in this category
Sale
Fixed Income Course
4.7 (487 ratings)
9 Courses | 37+ Hours | Full Lifetime Access | Certificate of Completion
View Course

Coupon-vs-Yield

What is  Yield to Maturity?

Yield to maturity is the effective rate of return of a bond at a particular point in time. On the basis of the coupon from the earlier example, suppose the annual coupon of the bond is $40. And the price of the bond is $1150, then the yield on the bond will be 3.5%.

Coupon vs. Yield Infographic

Let’s see the top differences between coupon vs. yield.

Coupon-vs-Yield-info

Key Differences

  • For the calculation of the coupon rate, the denominator is the face value of the bond, and for the calculation of the yield of a bond, the denominator is the market price of the bond.
  • The coupon rate is fixed for the entire duration of the bond as both the numerator and the denominator for the calculation of the coupon rate do not change. The yield of a bond changes with the change in the price of the bond.
  • Change in the interest rate in the economy by the central bank has no effect on the coupon rate of a bond. The price of a bond is inversely proportional to the interest rates. The yield of a bond changes with the change in the interest rate in the economy.

Coupon vs. Yield Comparative Table

Basis Coupon rate Yield
Definition The coupon is similar to the interest rate, which is paid by the issuer of a bond to the bondholder as a return on his investment. The yield to maturity of a bond is the interest rate for a bond, which is calculated on the basis of coupon payment and the current market price of a bond.
Basis of calculation The coupon rate is calculated with numerator as the coupon payment and the denominator as the face value of the bond. The coupon rate is calculated with numerator as the coupon payment and the denominator as the market price of the bond.
Effecting delta The coupon rate remains fixed for the entire duration of a bond as the coupon payment is fixed, and also the face value is fixed. Yield changes with the change in the market price of a bond.
Effect of interest rate Change in the interest rate in the economy by the central bank has no effect on the coupon rate of a bond. The price of a bond is inversely proportional to the interest rates. With the increase of interest rate, the price of a bond will decrease, as the investor then will look for a higher yield from a bond. And with the decrease of interest rate, the price of a bond will increase as then the investor will happy with the lower interest rate.
Example Suppose the face value of an XYZ bond is $1000, and the coupon payment is $40 annually. The way the coupon rate is calculated is by dividing the annual coupon payment by the face value of the bond. In this case, the coupon rate for the bond will be $40/$1000, which is a 4% annual rate. Suppose the annual coupon of a bond is $40. And the price of the bond is $1150, then the yield on the bond will be 3.5%.

Final Thoughts

Coupon rates and yield are very important components of a bond for an investor in a bond. The coupon rate is paid either quarterly, semi-annually, or yearly depending on the bond. On the basis of the coupon payment and face value of the bond, the coupon rate is calculated.

The yield of the bond, on the other hand, is the interest rate on the basis of the current market price of the bond and is thus also known as the effective rate of return for a bond. The yield of a bond changes with a change in the interest rate in the economy, but the coupon rate does not have the effect of the interest rate.

Recommended Articles

This has been a guide to the Coupon vs. Yield. Here we discuss the top differences between coupon rate and yield to maturity along with infographics and a comparison table. You may also have a look at the following articles –

  • Coupon Rate and Interest Rate
  • Calculation of Convexity of a Bond
  • Bond Equivalent Yield
  • Zero-Coupon Bond Formula
0 Shares
Share
Tweet
Share
Primary Sidebar
Footer
COMPANY
About
Reviews
Contact
Privacy
Terms of Service
RESOURCES
Blog
Free Courses
Free Tutorials
Investment Banking Tutorials
Financial Modeling Tutorials
Excel Tutorials
Accounting Tutorials
Financial Statement Analysis
COURSES
All Courses
Financial Analyst All in One Course
Investment Banking Course
Financial Modeling Course
Private Equity Course
Venture Capital Course
Excel All in One Course

Copyright © 2021. CFA Institute Does Not Endorse, Promote, Or Warrant The Accuracy Or Quality Of WallStreetMojo. CFA® And Chartered Financial Analyst® Are Registered Trademarks Owned By CFA Institute.
Return to top

WallStreetMojo

Free Investment Banking Course

IB Excel Templates, Accounting, Valuation, Financial Modeling, Video Tutorials

* Please provide your correct email id. Login details for this Free course will be emailed to you

Book Your One Instructor : One Learner Free Class
WallStreetMojo

Free Investment Banking Course

IB Excel Templates, Accounting, Valuation, Financial Modeling, Video Tutorials

* Please provide your correct email id. Login details for this Free course will be emailed to you

Let’s Get Started
Please select the batch
Saturday - Sunday 9 am IST to 5 pm IST
Saturday - Sunday 9 am IST to 5 pm IST

This website or its third-party tools use cookies, which are necessary to its functioning and required to achieve the purposes illustrated in the cookie policy. By closing this banner, scrolling this page, clicking a link or continuing to browse otherwise, you agree to our Privacy Policy

Login

Forgot Password?

New Year Offer - Fixed Income Course (9 courses, 37+ hours videos) View More