BAJAJ BROKING

Notification close image
No new Notification messages
card image
Monika Alcobev IPO is Open!
Apply for the Monika Alcobev IPO through UPI in just minutes.
delete image
card image
Start your SIP with just ₹100
Choose from 4,000+ Mutual Funds on Bajaj Broking
delete image
card image
Open a Free Demat Account
Pay ZERO maintenance charges for the first year, get free stock picks daily, and more.
delete image
card image
Trade Now, Pay Later with up to 4x
Never miss a good trading opportunity due to low funds with our MTF feature.
delete image
card image
Track Market Movers Instantly
Stay updated with real-time data. Get insights at your fingertips.
delete image

What Is the Coupon Rate on a Bond?

The coupon rate in a bond refers to the fixed annual interest paid to the bondholder based on the bond’s face value. This payment is made by the issuer, typically on a semi-annual or annual basis, from the issue date until the bond matures. It does not adjust based on market interest rate changes.

Coupon rate meaning comes from the days when physical bond certificates had detachable coupons that investors submitted to receive interest payments. Today, the term still represents the fixed interest paid on a bond, even in electronic format.

The coupon rate of a bond is determined at the time of issuance. It reflects the interest rate environment and credit risk of the issuer at that time. While the bond’s price may fluctuate in the secondary market, the coupon rate remains constant throughout the bond’s life. This makes it a useful reference point for comparing fixed-income options.

Understanding what is coupon rate is essential in evaluating income potential before considering price movements or other yields like yield to maturity.

How Are Coupon Rates Determined?

The coupon rate of the bond is determined through a step-by-step process:

  • The first step is to arrive at the value of bond issuance, which is known as the face value or par value.

  • The next step is to determine the number of coupon payments to be made during a year. The issuer may pay the interest quarterly, semi-annually, or yearly. When all the coupon payments are summed up, the resultant number is the annual coupon payment of the bond.

  • The final step is to calculate the coupon rate, by dividing the annual coupon payment by the face value of the bond.

For example, ABC company decides to issue a bond with a face value of Rs. 1000. The company decided to pay the interest of Rs. 50 each quarter.

Here, annual coupon payments = Rs. 50*4 = Rs. 200

Coupon rate = annual coupon payment / face value of bond

= 200/1000

= 0.2 or 20%

Coupon Rate Formula

Now that the question of what is coupon rate is answered, let us take a look at the coupon rate formula. The coupon rate formula helps determine the fixed annual interest a bondholder receives. It is calculated as:

Coupon Rate=(Annual Coupon Payment/Face Value of the Bond)×100

For example, if a bond has a face value of Rs. 1,000 and pays Rs. 80 annually, the coupon rate is (80/1000)×100=8%(80/1000) \times 100 = 8\%.

The coupon rate remains fixed throughout the bond’s tenure, irrespective of market interest rate changes. However, it differs from yield, which fluctuates based on bond prices in the secondary market. Investors use the coupon rate to compare bond returns with other fixed-income securities.

Coupon Rate vs. Yield

The coupon rate and yield are key concepts in bond investing but differ in their calculation and impact. The coupon rate is the fixed annual interest a bondholder receives, expressed as a percentage of the bond’s face value. It remains constant throughout the bond’s tenure. For example, a bond with a Rs. 1,000 face value and a 7% coupon rate pays Rs. 70 annually, regardless of market conditions.

In contrast, yield represents the actual return an investor earns based on the bond’s current market price. If a bond is bought at a premium (above face value), the yield will be lower than the coupon rate, whereas if bought at a discount (below face value), the yield will be higher. Yield can be calculated using Yield to Maturity (YTM) or Current Yield formulas. Investors use yield to assess bond profitability in dynamic market conditions, while the coupon rate helps compare bonds with fixed-income securities.

Example of Coupon Rates

A coupon rate example helps illustrate how bond interest payments work. Suppose a government bond has a face value of Rs. 1,000 and a coupon rate of 6%. This means the bondholder receives Rs. 60 annually (Rs. 1,000 × 6%) as interest. If the bond pays interest semi-annually, the investor will receive Rs. 30 every six months until maturity. The coupon rate remains fixed regardless of market fluctuations.

Now, consider a corporate bond with a Rs. 5,000 face value and a coupon rate of 8%. Here, the investor gets Rs. 400 annually (Rs. 5,000 × 8%). These examples show how coupon rates determine regular bondholder earnings, helping investors compare fixed-income securities effectively.

Other Types of Yields That Bonds Pay

Yield to Maturity (YTM)

This figure shows the overall return if you hold the bond until it matures. It considers the interest paid and any difference between the current price of the bond and its face value. YTM is often used to assess long-term value beyond just the fixed coupon rate.

Yield to Call (YTC)

YTC applies to bonds that can be repaid early by the issuer. It reflects the return earned if the bond is called before maturity. This type of yield is based on the first date the issuer can repay the bond and usually changes if interest rates shift.

Yield to Worst (YTW)

YTW is the lowest yield you might receive if the bond is called or matures early. It is calculated by comparing YTC and YTM and taking the lower value. This yield is useful when estimating conservative outcomes in callable bonds.

Tax-Equivalent Yield (TEY)

TEY adjusts the yield of a tax-exempt bond to show what a taxable bond would need to yield to match it, accounting for the investor’s tax bracket. This yield is often used when comparing municipal bonds with other fixed-income securities that are taxable.

How does Coupon Rate Work?

The coupon rate in bond terms is calculated using two figures: the bond’s face value and its annual interest payment. To find the rate, divide the yearly interest by the face value and multiply the result by 100.

For instance, if a bond has a face value of ₹2,500 and pays ₹125 in interest each year, the coupon rate is 5%. This rate reflects the fixed amount paid by the issuer every year, regardless of how the bond’s price moves in the market after it is issued.

The coupon rate remains unchanged throughout the bond’s term. It allows investors to understand how much interest the bond is structured to pay each year, based on its original terms. This calculation does not account for bond pricing in secondary markets or other forms of yield.

How Are Coupon Rates Affected by Market Interest Rates?

Coupon rates on newly issued bonds are directly influenced by prevailing market interest rates. When interest rates rise, new bonds offer higher coupon rates to remain competitive, while existing bonds with lower rates lose value. Conversely, when interest rates fall, new bonds have lower coupon rates, making older bonds with higher rates more valuable in the secondary market. Central bank policies, inflation, and economic conditions impact interest rates, thereby affecting how coupon rates are set for new bond issuances.

What's the Difference Between Coupon Rate and YTM?

The coupon rate and yield to maturity (YTM) are both key measures in bond investing but differ in calculation and significance. The coupon rate is the fixed annual interest a bondholder receives, expressed as a percentage of the bond’s face value. It remains unchanged throughout the bond’s tenure. For example, a bond with a Rs. 1,000 face value and a 7% coupon rate pays Rs. 70 annually.

In contrast, YTM is the total return an investor earns if the bond is held until maturity, considering both interest payments and any capital gains or losses. If a bond is purchased at a premium, YTM is lower than the coupon rate, while if bought at a discount, YTM is higher. YTM accounts for market price fluctuations, making it a more comprehensive measure of bond profitability.

How to Calculate and Interpret Effective Yield? 

Effective yield measures a bond’s actual return, considering compound interest from reinvested coupon payments. Unlike the coupon rate, which remains fixed, effective yield reflects the impact of more frequent interest payments. It is calculated as:

Effective Yield = (1 + (Coupon Rate / Number of Periods)) ^ Number of Periods - 1

Investors use it to assess true returns, especially for bonds with semi-annual or quarterly payments.

Conclusion

In conclusion, the coupon rate is a fundamental aspect of bond investing, as it determines the fixed interest payments bondholders receive throughout the bond’s tenure. While the coupon rate remains constant, external factors such as market interest rates, inflation, and bond pricing significantly impact a bond’s yield and overall attractiveness. Understanding key differences between coupon rate, yield to maturity (YTM), and effective yield allows investors to make well-informed decisions. By carefully analyzing these metrics, investors can evaluate bond profitability, manage risk, and align their portfolios with changing market conditions and long-term financial goals.

Do you have a trading account app or demat account app?

You can open an account with Bajaj Broking in minutes.

Download the Bajaj Broking app now from Play Store or App Store.

Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.

This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.

For All Disclaimers Click Here: https://www.bajajbroking.in/disclaimer

Share this article: 

Frequently Ask Questions

No Data Found

search icon
investment-card-icon

What are The Oldest Mutual Funds: Advantages & Performance

Oldest mutual funds in India are those by companies that have operated for decades and were pioneers in the country’s mutual fund industry.

investment-card-icon

How to Change Name in EPF Account: Step By Step Guide

Learn how to change your name in EPF account online or offline to avoid claim delays and ensure smooth e-KYC processing with updated Aadhaar records.

investment-card-icon

Foreign Exchange Control Meaning, Rules & Country Examples

Foreign exchange controls impact trade, currency flow, and policy. Get detailed insights into their goals, effects, practices, and global enforcement patterns.

investment-card-icon

Advantages of SIPs in ETFs: Start Small, Grow Your Wealth

SIPs in ETFs let you invest small amounts easily while benefiting from cost-effective diversification, liquidity, and compounding returns over time.

investment-card-icon

Difference Between Growth vs IDCW

Confused between Growth and IDCW options in mutual funds? Learn the key differences, tax implications, and which suits your investment goals.

investment-card-icon

What is Statement of Additional Information (SAI)

Discover what a Statement of Additional Information (SAI) is in mutual funds. Learn its importance, contents, and how it aids in informed investment decisions.

investment-card-icon

How Brokerage Calculators Work

Brokerage calculators estimate your total trading costs, including fees and taxes. Use them to make smarter, cost-efficient decisions on every trade.

investment-card-icon

Margin Calculator for Futures Trading

Calculate your futures trading margin instantly with Bajaj Broking's advanced margin calculator. Ensure precise risk management and informed trading decisions.

investment-card-icon

Difference Between Growth vs IDCW

Confused between Growth and IDCW options in mutual funds? Learn the key differences, tax implications, and which suits your investment goals.

investment-card-icon

Chit Funds Vs Mutual Funds

Get insights into Chit Funds and Mutual Funds in India. Compare their working methods, pros, cons, and decide which investment option suits your needs.

Disclaimer :

The information on this website is provided on "AS IS" basis. Bajaj Broking (BFSL) does not warrant the accuracy of the information given herein, either expressly or impliedly, for any particular purpose and expressly disclaims any warranties of merchantability or suitability for any particular purpose. While BFSL strives to ensure accuracy, it does not guarantee the completeness, reliability, or timeliness of the information. Users are advised to independently verify details and stay updated with any changes.

The information provided on this website is for general informational purposes only and is subject to change without prior notice. BFSL shall not be responsible for any consequences arising from reliance on the information provided herein and shall not be held responsible for all or any actions that may subsequently result in any loss, damage and or liability. Interest rates, fees, and charges etc., are revised from time to time, for the latest details please refer to our Pricing page.

Neither the information, nor any opinion contained in this website constitutes a solicitation or offer by BFSL or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service.

BFSL is acting as distributor for non-broking products/ services such as IPO, Mutual Fund, Insurance, PMS, and NPS. These are not Exchange Traded Products. For more details on risk factors, terms and conditions please read the sales brochure carefully before investing.

Investments in the securities market are subject to market risk, read all related documents carefully before investing. This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.

[ Read More ]

For more disclaimer, check here : https://www.bajajbroking.in/disclaimer

Our Secure Trading Platforms

Level up your stock market experience: Download the Bajaj Broking App for effortless investing and trading

Bajaj Broking App Download

10 lakh+ Users

icon-with-text

4.2 App Rating

icon-with-text

4 Languages

icon-with-text

₹5600+ Cr MTF Book

icon-with-text
banner-icon

Open Your Free Demat Account

Enjoy low brokerage on delivery trades

+91

|

Please Enter Mobile Number

Open Your Free Demat Account

Enjoy low brokerage on delivery trades

+91

|