Why is the Yield different from the coupon?

Why is the Yield different from the coupon?

The yield and the coupon rate of a bond are two distinct concepts that serve different purposes:

1. Coupon Rate: The coupon rate of a bond is the fixed annual interest payment expressed as a percentage of the bond's face value. It is determined at the time of issuance and remains constant throughout the bond's life. The coupon rate determines the amount of income the bondholder receives periodically.

2. Yield: The yield of a bond, such as the yield to maturity (YTM) or yield to call (YTC), represents the total return an investor can expect to receive from holding the bond over its entire term. Unlike the coupon rate, which only considers the fixed interest payments, the yield takes into account changes in the bond's price relative to its face value, as well as the reinvestment of coupon payments. 

The yield reflects the bond's current market price and prevailing interest rates, which may differ from the bond's coupon rate. Therefore, the yield and the coupon rate can be different due to fluctuations in bond prices and changes in market conditions.



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