Bonds are securities that provide you with a guaranteed return on investment. They’re among the top alternatives for investors who are cautious as they carry a lower chance of default and offer more return when compared to traditional options like banks’ FDs.
The truth is that most investors trying to invest in bonds can be confused between two different metrics: the coupon rate and the maturity yield. But, contrary to popular opinion, both metrics are different. If you’re curious about the other between yield to maturity relative to bonds and a bond, read on to learn more.
What are the coupon rates?
The coupon rate is the interest paid to the bearer of an obligation by the issuer over time. It is calculated in percentage terms regarding an amount in the value. For example, if a bond has a face value of 1,000 rupees. 1,000, and a coupon rate of 10%, the annual interest amount will be 100 rupees).
The coupon rate is the interest rate paid by the bond at its face value.
What is maturity yield?
The return determines what bondholders will get if they keep the bond until it is matured. This yield is essential when an investor buys bonds in the secondary market. This yield considers the interest payments already paid and the capital losses or gains that could be experienced over the glue.
The maturity yield is crucial because it represents the return they earn from their investment.
What is the significance of the Coupon Rate being Higher than the Yield?
If the interest rate for the bond is higher than the yield, the bond will trade at a higher price. This is due to the fixed interest rate on the bond being higher than the current interest rates. Therefore, investors will pay a premium for the higher coupon. This is why bond prices vary in tandem with the interest rate. When interest rates drop as bond prices rise, interest rates rise.
What is the difference between the Interest Rate and the Coupon Rate?
The coupon rate refers to the interest that bonds pay relative to their face value. For a fixed-rate bond, it will be the same throughout its time of maturity. Interest rates at the time of issue could increase or decrease in the interim, which could influence the bond cost (given the Fixed Coupon Rate). Generally, the bond’s coupon will be equivalent to interest rates when it’s first issued.
Conclusion
For those who buy an obligation directly from the company via an offer that is new to remain in the bond until maturity. In the case of bond traders who purchase and sell bonds on the secondary market, it is the one they need to consider. This is because the YTM calculation also includes any possible losses or gains in the event of changes in the bond price.
