# Difference Between Coupon Rate and Interest Rate

Before starting off the article, one thing has to be made clear here, that the coupon rate is totally different from the interest rate. A coupon rate is an annual interest payment, which is provided by the bond issuer to the bondholder at the time of maturity.

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Finance Quiz

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An 'Overdraft' is  where a business is permitted to overspend on its bank account up to an agreed limit.

2 / 5

Government grants are generally offered to businesses in:

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What is the definition of a liquid asset?

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Which is not a cash activity listed on the cash flow statement?

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A 'Debenture' is?

In the meantime, coming to the interest rate, it is the charges put on the payment by the lender to the borrower.

## Coupon Rate vs Interest Rate

Coupon rate has a fixed rate throughout the life of the bond. Meanwhile, the interest rate changes its rate according to the bond yields.

The coupon rate is the annual rate of the bond that has to be paid to the holder. Also, it depends on the par value, that is, the face value of the band during the issue period.

On the other hand, the interest rate is the money to be added by the lender to extract the lent money from the borrower. The payment will be increasing as per the interest rate put on by the lender.

## What is Coupon Rate?

The coupon rate is also known as the nominal rate. It is defined by the fixed interest secrets of the bondholder.

The final amount will be received by the holder at the end of the maturity period. Additionally, the coupon rate will be stable till the bondholder receives his money.

Having that said; theoretically, the coupon rate is calculated by dividing the total amount of annual payments made by a bond with the face value of the bond initially.

There are three types of coupon rates depending on their fixed-income securities.

Firstly, it is the zero-coupon bonds. They don’t have any coupon payment for the bondholder to pay for. Also, it is affordable by the holder at a price lesser than the original par value of the bond.

Secondly, Step-Up notes, unlike the true definition of a coupon rate, tend to increase the rate at a set period. Lastly, floating-rate securities depend on the reference rate of the coupons.

## What is Interest Rate?

On the other hand, it is also known as the annual percentage. The interest rate refers to the money plus interests that have to be paid by the holder to the lender.

The final amount of the bond that has to be paid by the borrower depends on the bond’s principal sum, the interest rate, and the span over which it is taken.

The change in the rate varies every month or day. It is due to the short-term political gain, risks of investments, taxes, banks, and so on.

The interest rate has two formulae contributing to simple interest and compound interest.

The simple interest is calculated by multiplying the principal amount with the annual interest rate and term of the loan over the years.

Meanwhile, compound interest is by multiplying principal amount with (1+ annual rate interest) and term of the loan in years. The maturity period will end when the interest is completely paid by the borrower to the bond’s lender.

## Main Differences Between Coupon Rate and Interest Rate

1. Coupon rates are calculated on the fixed-income security, whereas interest rates are calculated on the amount which has been lent to borrowers.
2. The coupon’s face value determines the nominal value of the bond. Albeit the Interest rate’s face value affected by the amount due on.
3. The coupon rate follows a formula to calculate the rate. In contrast, the Interest rate follows two methods to sum the rate value-simple interest and compound interest method.
4. The rates of a coupon vary according to the types of coupon such as Zero, Step-up and Floating coupon rate. The interest rate has three types as Nominal, Effective and real interest rate.
5. In the case of coupon rate, the bondholder already mentioned the maturity while issuing for the bond, but in interest rate- the maturity period ends only if the amount is full-settled by the borrower.

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