What are the differences between Coupon and Yield?
Coupon Rate:
- Definition: The coupon rate is the annual interest
rate paid by the bond issuer on the bond's face value. It is fixed and
does not change throughout the bond's life.
- Formula: Coupon Rate =Annual Coupon Payment /Face Value
of the Bond*100
- Example: For a bond with a face value of ₹1,000
and an annual coupon payment of ₹50, the coupon
rate
- Coupon Rate =50/1000*100 = 5%
Yield:
- Definition: Yield, specifically the current yield,
reflects the bond's annual return based on its current market price. It
varies with bond price fluctuations.
- Formula: Current Yield=Annual Coupon Payment/Current Market Price of
the Bond
- Example: If the same bond's market price changes to ₹1,100, the
current yield
- Current Yield = 50/1100 ≈ 4.55%
Key
Differences:
|
Aspect
|
Coupon
Rate
|
Yield
|
|
Definition
|
The
coupon rate represents the fixed annual interest rate a bond pays based on
its face value.
|
YTM is
the effective rate of return of a bond at a particular point in time,
considering the coupon payments and the bond’s current market price.
|
|
Calculation
|
Calculated
by dividing the annual coupon payment by the face value of the bond.
|
Calculated
based on the coupon payment and the bond’s current market price.
|
|
Fixed
or Variable
|
Fixed
irrespective of changes in the bond’s price.
|
Varies
with changes in the bond’s market price.
|
|
Impact
of Price Change
|
Unaffected
by fluctuations in the bond’s purchase price.
|
Changes
with the bond’s market price.
|
5paisa provides detailed insights and real-time data on
both coupon rates and yields, helping investors distinguish between these
concepts. The platform offers tools and calculators to track how market price
changes affect yields, enabling informed investment decisions. 5paisa’s
resources ensure that investors can accurately assess the returns on their bond
investments.
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