Difference Between Bond Yield and Coupon Rate

Bond Yield and Coupon Rate are both used in terms of a bond but are different. Talking about finance, a Bond is a tool that shows the debt of the one issuing the bond to its holder. Both Bond Yield and Coupon rates are used when the bond is issued.

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Bond Yield vs Coupon Rate

The coupon rate is the interest rate that a bond issuer promises to pay to the bondholder. Bond yield is the return an investor will earn on a bond based on the bond’s coupon rate and current market price. The coupon rate is fixed and does not change over the bond’s life, but the yield can fluctuate based on the bond’s market price and interest rate environment.

Bond Yield vs Coupon Rate

Bond Yield, commonly known as Yield, designates the revenue return on the bond. In short, a bond yield is calculated by dividing the coupon amount(interest) by the price. This shows that a bond yield is proportional to the price. If the price changes, the Yield of the bond changes too.

Coupon Rate/Interest is the annual interest calculated on the bond by the issuer. All bonds don’t need to have a Coupon Rate. Some of the bonds work on the system of Zero-Coupon bonds. In the case of a Zero-coupon bond, its value is always less than the face value.

Comparison Table

Parameters of ComparisonBond YieldCoupon Rate
DefinitionBond Yield, commonly known as Yield, designates the revenue return on the bond.Coupon Rate can be understood as the interest that the bondholder receives annually till the date of maturity of the bond.
Formula The Bon Yield is calculated by the formula: (Coupon amount/Price) The coupon rate is calculated by: (Total sum of the coupon rates/Face value of the bond).
VitalityA bond must have a yield or bond yield.A coupon rate is a vital bust, not a need, as many bonds work on the zero-coupon rate.
HistoryIt is known as yield/bond yield from the very start.Coupons (sum of coupon rate) were known as bearer certificates earlier.
Mutual RelationIf a bond is purchased at a reduction, the yield to maturity becomes more significant than the coupon rate. In the case of premium, the yield to maturity is inferior to the coupon rate.

What is Bond Yield?

Bond Yield, also known as Yield, defines the return rate of a bond. When digging more into this term, bond yield accounts for the time rate of money and compound interest returns. To understand the Yield on a bond, one can divide the coupon amount by the face value upon maturity.

Bond Yield is indirectly proportional to the price. As the price increases, the yield falls or vice-versa. When a bond is issued, the bondholder entrusts some money to the issuer. The bond issuer then pays the interest on the bond till the time it is in operation.

Upon maturity, the face value of the bond begins working.

For example, a bondholder buys a bond at $1000 with a coupon of 10%. If the bondholder holds the bond for 10 years, he/she will get paid 100 dollars each year by the issuer for the successive 10 years. At the end of the duration, the issuer will pay 1000 dollars in this case. ‘

The bond yield stands at 10% on the scheduled date and can be calculated by the formula: (Coupon amount/Price).

bond yield

What is Coupon Rate?

A coupon Rate can be understood as the interest the bondholder receives annually until the bond’s maturity date. The sum of coupon rates together is a coupon calculated by the formula: (Total sum of the coupon rates/Face value of the bond).

The term coupon originated from bearer certificates issued in the initial days. The bearer certificates acted as proof for claiming ownership at that time. Several coupons were given on the document, each signifying a scheduled interest payment.

On the due date, the coupon gets presented as a payment by the owner. Talon, another document comprised of the certificate, is displayed in trade for extra coupons.

Talking about Coupons, all the bonds don’t need a coupon rate. Some bonds work. Some bonds work on the concept of zero-coupon rate.
A zero-coupon bond comprises no coupons and thus consists of a 0% coupon rate.

The bondholder is only paid a face-time value before the date of maturity.

coupon rate

Main Differences Between Bond Yield and Coupon Rate

  1. Bond Yield stands for the rate of return on a bond, whereas the coupon rate shows the interest to be received by the bondholder annually.
  2. The Bond Yield is calculated by the formula: (Coupon amount/Price). On the other hand, the coupon rate is calculated by (Total sum of the coupon rates/Face value of the bond).
  3. A bond needs a yield, but a band doesn’t need a coupon rate. In this case, a zero-coupon rate system is used on the bond.
  4. If a bond is purchased at a reduction, the yield turns out to be greater than the coupon rate. In the case of premium, the yield is inferior to the coupon rate.
  5. Historically, the sum of all the coupon rates was known as bearer certificates, whereas bond yield was not the case.

References

  1. https://www.jstor.org/stable/2353247
  2. https://www.tandfonline.com/doi/abs/10.1080/09603100801964370
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