Coupon Rate vs Interest Rate: Difference and Comparison

Before starting the article, one thing must be made clear here; the coupon rate is different from the interest rate. A coupon rate is an annual interest payment the bond issuer provides to the bondholder at maturity.

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

Key Takeaways

  1. The coupon rate is the rate at which a bond’s issuer promises to pay the bondholder for the bond’s duration.
  2. Interest rate is the rate at which a lender charges a borrower for the use of borrowed money.
  3. The coupon rate is fixed, while the interest rate may vary based on market conditions and other factors.

Coupon Rate vs Interest Rate

A coupon rate is a rate that is determined by the bond’s issuer and is based on the bond’s face value. Its yield is heavily influenced by the interest rates set by the government. While interest rate refers to the amount that the lender charges the borrower. It is entirely determined by the lender.

Coupon Rate vs Interest Rate

The coupon rate is the bond’s annual rate that must 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 loan money from the borrower. The payment will increase as per the interest rate put on by the lender.

Comparison Table

Parameters of ComparisonCoupon RateInterest Rate
MeaningA coupon rate is an annual interest payment the bondholder receives on the bonds after the maturity period ends. Coupon rates are issued on fixed-income security such as bonds, mortgages, securities etc.Interest rate is charged to the borrower by the lender in case of any borrowing or lease. 
Face valueThe nominal value of the security or bonds determines face values.The face value of the Interest rate is dissuaded as the amount of a debt precluded by the borrower.
Maturity period A coupon rate is a fixed bond payment, and the holder issues the maturity period at the initial stage of issuing the bond. It varies according to the bondholders—for instance, a 5-year bond period.Borrowers are asked to pay back the amount they have borrowed within a specific period, which consists of an interest rate per annum. For example, she/he borrowed money based on ten years; within ten years, he/she asked to settle with a specific interest rate. 
Other namesCoupon rates are also termed Yield rate and Nominal yield.Interest rate is also known as borrowing rate, rate of interest, prime rate, cost of money and bank rate.
Calculation Coupon Rate= Coupon value/ Par valueTwo methods- simple interest and compound interest rate.SI=Principal amount x Rate of interest x Period CI= Principal x (1+Rate of interest)
Types of Coupon RatesZero-coupon bonds(no changes in coupon rate), step-up bonds(increase coupon rate) and floating-coupon rate(fluctuation) securities. Nominal interest rate, effective rate and real interest rate.

What is Coupon Rate?

The coupon rate is also known as the nominal rate. The fixed interest secrets of the bondholder define it.

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

That said, theoretically, the coupon rate is calculated by dividing the total amount of annual payments made by a bond by 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. 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 fixed period. Lastly, floating-rate securities depend on the reference rate of the coupons. 

coupon rate

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 short-term political gain, risks of investments, taxes, banks, etc. 

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

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

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

interest rate

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 lent to borrowers. 
  2. The coupon’s face value determines the bond’s nominal value, albeit the Interest rate’s face value is affected by the amount due. 
  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.
  4. The coupon rates vary according to the type of coupon, such as Zero, Step-up and Floating coupon rates. The interest rate has three types Nominal, Effective and real interest rate.
  5. Regarding the coupon rate, the bondholder already mentioned maturity while issuing the bond. Still, in interest rate, the maturity period ends only if the borrower fully settles the amount. 
Difference Between X and Y 2023 04 25T172351.177
References
  1. https://books.google.co.in/books?hl=en&lr=&id=ytT-W8_KL-AC&oi=fnd&pg=PA199&dq=meaning+coupon+rate&ots=W6ayPGouqC&sig=HUZTesNjN5O6NQgbCwepYLTo79A
  2. https://books.google.co.in/books?hl=en&lr=&id=C31l_fs-mMkC&oi=fnd&pg=PR7&dq=meaning+interest+rate&ots=E-LcncoaGi&sig=dhPkG0VCDKGaIs_KNsAR-coT3Ws

Last Updated : 13 July, 2023

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21 thoughts on “Coupon Rate vs Interest Rate: Difference and Comparison”

  1. I appreciate the in-depth analysis of coupon rate and interest rate provided in this article. It’s valuable information for anyone looking to understand bond investments.

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  2. The breakdown of coupon rate and interest rate in this article is both educational and insightful. It’s a valuable resource for understanding bond-related terms.

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  3. It’s interesting to see the detailed comparison between coupon rate and interest rate. I appreciate the clear explanation provided here.

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  4. The explanations provided in this article are very thorough and insightful. It’s great to have such detailed information about coupon rate and interest rate in one place.

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  5. The comparison between coupon rate and interest rate in this article is well-detailed and informative. It’s a great resource for individuals wanting to enhance their knowledge of bond investments.

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  6. I’m glad this article clarified the difference between coupon rate and interest rate. This is valuable knowledge for anyone involved in bond investments.

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  7. Great explanation of the difference between coupon rate and interest rate! Very informative and well-written article.

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  8. I found the comparison table to be very useful in understanding the differences between coupon rate and interest rate. This article is a great resource for anyone looking to expand their financial knowledge.

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