Coupon rate
Topic: Financial Markets, Instruments, Insurance and Pensions · NCERT: Class 12, Ch 3 "Money and Banking"
Meaning
The coupon rate is the fixed yearly payment a bond makes, shown as a percentage of its face value (the amount repaid at maturity). It is fixed when the bond is issued and stays the same even when the bond's market price changes. Its formula is:
Coupon rate = annual coupon payment ÷ face value × 100
Example
In the NCERT example, a bond has a face value of Rs 100 and a 10% coupon. It pays Rs 10 each year. If the bond's price rises to Rs 109.29, the coupon is still Rs 10. The current yield, however, falls to 10/109.29 ≈ 9.15%.
Don't confuse with
- Yield: the current yield is the coupon ÷ market price, and yield to maturity is the discount rate that makes the present value equal the price. Both change as the bond's price moves. The coupon rate is based on face value and stays fixed.
Related concepts
- Bonds
- Present value
- Bond price and interest rate inverse relation
- Capital gain
- Zero-coupon bond
- Floating rate bond
- Mark-to-market
- Yield curve
- Inverted yield curve
- Credit rating