Current Yield vs Coupon Rate: Difference and Comparison

‘Current Yield’ and ‘Coupon Rate’ are two different terms, but these terms are related to bonds and shares. Many people turn towards other methods like mutual funds, stock market, share market, etc., to invest their money for better returns.

So these two terms are essential to understand how the market works.

Key Takeaways

  1. Current yield refers to the rate of return on a bond investment, calculated by dividing the annual interest payment by the bond’s current market price.
  2. The coupon rate is the interest rate stated on the face of the bond at the time of issuance.
  3. The current yield reflects the current market value of a bond, while the coupon rate is fixed at the time of issuance.

Current Yield vs Coupon Rate

Current yield refers to the annual interest payment made by a bond or other fixed-income investment relative to its current market price, expressed as a percentage. The coupon rate is the annual interest rate stated on the bond when it’s issued, as a percentage of the bond’s face value.

Current Yield vs Coupon Rate

The Current Yield is a mathematical instrument that can tell about the expected income from any investment. Generally, it is used for bonds.

It can be calculated by dividing the annual income from the bond by the current price of the bond. It is an excellent method to check expectations from a bond.

A Coupon Rate is a fixed interest that a bondholder gets annually until it completely matures, whatever the current status of the bond value. Generally, the annual amount due to the coupon rate is paid twice a year.

It does not depend on the bond’s face value or par value.

Comparison Table

Parameters of ComparisonCurrent YieldCoupon Rate
Definition It is the expected annual income from a bond.It is a fixed amount of interest an issuer gets annually.
NatureIt keeps changing for a particular bond with time intervals.It is a fixed interest and does not change for a particular bond.
Formula Annual cash payment ÷ Market price(Total annual coupon payment ÷ Face value of bond) × 100%
Risk EffectIt can be affected by risk.It does not get affected by any risk.
Relevance It is just a tool to check expectations.It is an actual percentage that the stockholder gets.

What is the Current Yield?

The Current Yield is a method of bond yield measurement, which measures annual income from stock. It tells the investor the expected return from the bond if he invests in the bond for one year.

Also Read:  Umbrella vs Excess Liability: Difference and Comparison

Bond prices keep regularly changing, so the current yield is not an actual amount. Instead, it is an expected return only.

The Current Yield depends on the current market price, so it keeps changing. For example, XYZ issued a bond with a face value of $2000, and its annual coupon payment is $150.

The current market price of bonds is $1800, so the current yield can be calculated, resulting in the current yield equal to 8.33%.

In rare cases, the Current Yield can be equal to the coupon rate when a bond market price equals its face value.

It is higher when the bond market price gets lower than its face value and lower when the bond market price is higher than its face value.

Many other methods, like current yield, calculate bond yield like Yield to Maturity. The investor should consider all scenarios and check the return as the current yield does not consider the time effect on bond return.

These points can help to choose a perfect bond for a higher return.

What is Coupon Rate?

The coupon Rate is the actual amount a holder gets for any bond. It is paid annually till it gets mature.

It is a rate of interest. The government fixes this rate of interest.

It remains fixed whether the market value of the bond fall or rises, so it is an assured amount for a stockholder, whatever the condition is.

It is a fixed return on the bond. For example, if a company issues a bond with a face value of $100 and the coupon rate is 10%, it pays $10 annually to the bondholder. In general, it is paid two times semi-annually.

Also Read:  Nominal vs Real Interest Rate: Difference and Comparison

In most cases, investors prefer bonds with a high coupon rate. Sometimes coupon rates can also be zero, and insurance companies prefer it as the insurance companies’ interest rate risk is minimized with the help of zero-coupon bonds.

It is known as Coupon Rate. It s because, initially, investors used to get a sheet of paper coupons while purchasing a bond, which could be redeemed at regular intervals in exchange for real money.

Now in the age of digitalization, payments are made electronically.

Main Differences Between Current Yield and Coupon Rate

  1. The main difference between the current yield and coupon rate is that the current yield is just an expected return from a bond, and the coupon rate is the actual amount paid regularly for a bond until it matures.
  2. The Current Yield keeps changing as the market value of the bond changes, but the Coupon Rate of a particular bond remains the same.
  3. The Current Yield can be calculated by taking the annual cash payment ratio and the bond market price. On the other hand, the Coupon Rate is calculated by taking the percentage ratio of coupon payment to the face value of the bond.
  4. The Current Yield can be affected by the risk of the market, whereas the Coupon Rate does not affect by any condition of the market.
  5. The Current Yield is a value that depends on the market price of a bond, while the government fixes the Coupon Rate before issuing a bond.
References
  1. https://www.jstor.org/stable/41862457
  2. https://search.proquest.com/openview/ff642164edae9a9f49d0f1d0af16452f/1?pq-origsite=gscholar&cbl=1816399

Last Updated : 11 June, 2023

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28 thoughts on “Current Yield vs Coupon Rate: Difference and Comparison”

  1. This article gives a clear understanding of the differences between Current Yield and Coupon Rate in bond investment, which is essential for anyone who is considering investing in these. It is informative and well-explained.

    Reply
  2. This article seems to simplify the complex concepts of Current Yield and Coupon Rate, making it easier for beginners to comprehend. It’s a great resource for those looking to expand their investment knowledge.

    Reply
  3. The article does well in presenting the fundamental differences between Current Yield and Coupon Rate, offering readers a solid foundation for making informed investment decisions.

    Reply
  4. The article’s detailed comparison between Current Yield and Coupon Rate serves as a valuable educational piece. It effectively clarifies the intricacies of bond investments.

    Reply
  5. While helpful, the article predominantly focuses on the conventional aspects of Current Yield and Coupon Rate. A more forward-looking approach might add depth to the discussion.

    Reply
  6. The points of comparison between Current Yield and Coupon Rate are well-structured and provide a solid basis for understanding the dynamics of bond investments.

    Reply
  7. This article’s in-depth analysis of Current Yield and Coupon Rate is both engaging and informative. It equips readers with a comprehensive understanding of these vital financial metrics.

    Reply
  8. Although informative, the article presents a rather conservative outlook on bond investments. It would be beneficial to include some diverse perspectives to provide a more holistic view.

    Reply
  9. This post does a great job of distinguishing between Current Yield and Coupon Rate, but it could also provide additional scenarios or examples to demonstrate how these concepts apply in different investment situations.

    Reply
  10. The analysis of the implications and relevance of Current Yield and Coupon Rate in different bond scenarios is impressive. It’s an eye-opener for investors.

    Reply

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