Difference Between Coupon and Yield

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.

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What is  Yield to Maturity?

Yield to maturityYield To MaturityThe yield to maturity refers to the expected returns an investor anticipates after keeping the bond intact till the maturity date. In other words, a bond’s returns are scheduled after making all the payments on time throughout the life of a bond. Unlike current yield, which measures the present value of the bond, the yield to maturity measures the value of the bond at the end of the term of a bond.read more 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 bondPrice Of The BondThe bond pricing formula calculates the present value of the probable future cash flows, which include coupon payments and the par value, which is the redemption amount at maturity. The yield to maturity (YTM) refers to the rate of interest used to discount future cash flows.read more 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.

Key Differences

  • For the calculation of the coupon rate, the denominator is the face value of the bond, and for the calculation of the yieldCalculation Of The YieldThe Yield Function in Excel is an in-built financial function to determine the yield on security or bond that pays interest periodically. It calculates bond yield by using the bond’s settlement value, maturity, rate, price, and bond redemption.read more 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

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 priceMarket PriceMarket price refers to the current price prevailing in the market at which goods, services, or assets are purchased or sold. The price point at which the supply of a commodity matches its demand in the market becomes its market price.read more 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.

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 RateCalculation of Convexity of a BondBond Equivalent YieldZero-Coupon Bond Formula