Bond Yield and Coupon Rate are both used in terms of a bond but are different. Talking about finance, a Bond is a tool that shows the debt of the one issuing the bond to its holder. Both Bond Yield and Coupon rates are used when the bond is issued.
Bond Yield vs Coupon Rate
The main difference between Bond Yield and the Coupon rate is that Bond Yield is the return rate, whereas the Coupon Rate signifies the rate of interest to be paid annually. In simple terms, a bond’s coupon rate shows the substantive interest merited on the bond.
Bond Yield, or commonly known as Yield designates the revenue return on the bond. In short, a bond yield is calculated by dividing coupon amount(interest) by the price. This shows that a bond yield is proportional to the price. If the price changes, the Yield of the bond changes too.
Coupon Rate/Interest is the annual interest calculated on the bond by the issuer. All bonds don’t need to have a Coupon Rate. Some of the bonds work on the system of Zero-Coupon bonds. In the case of a Zero-coupon bond, its value is always less than the face value.
Comparison Table Between Bond Yield and Coupon Rate
| Parameters of Comparison | Bond Yield | Coupon Rate |
| Definition | Bond Yield, or commonly known as Yield, designates the revenue return on the bond. | Coupon Rate can be simply understood as the interest that the bondholder receives annually till the date of maturity of the bond. |
| Formula | The Bon Yield is calculated by the formula: (Coupon amount/Price) | The coupon rate is calculated by: (Total sum of the coupon rates/Face value of the bond). |
| Vitality | A bond must have a yield or bond yield. | A coupon rate is an important bust, not a need, as many bonds work on the zero-coupon rate. |
| History | It is known as yield/bond yield from the very start. | Coupons (sum of coupon rate) were known as bearer certificates earlier. |
| Mutual Relation | If a bond is purchased at a reduction, the yield to maturity becomes greater than the coupon rate. | In the case of premium, the yield to maturity is inferior to the coupon rate. |
What is Bond Yield?
Bond Yield, also known as Yield, defines the return rate of a bond. When digging more into this term, bond yield accounts for the time rate of money and compound interest returns. To understand the Yield on a bond simply, one can divide the coupon amount by the face value upon maturity.
Bond Yield is indirectly proportional to the price. As the price increases, the yield falls or vice-versa. When a bond is issued, the bondholder entrusts some money to the issuer. The bond issuer then pays the interest on the bond till the time it is in operation. Upon maturity, the face value of the bond begins working.
For example, a bondholder buys a bond at $1000 with a coupon of 10%. If the bondholder holds the bond for 10 years, he/she will get paid 100 dollars each year by the issuer for the successive 10 years. At the end of the duration, the issuer will pay 1000 dollars in this case. The bond yield stands at 10% on the scheduled date and can be calculated by the formula: (Coupon amount/Price).
What is Coupon Rate?
Coupon Rate can be simply understood as the interest that the bondholder receives annually until the bond’s date of maturity. The sum of coupon rates together is known as a coupon calculated by the formula: (Total sum of the coupon rates/Face value of the bond).
The term coupon has originated from bearer certificates that were issued in the initial days. The bearer certificates acted as the proof for claiming ownership at that time. Several coupons were given on the document, each signifying a scheduled interest payment. On the due date, the coupon gets presented as a payment by the owner. Talon, another document that was comprised with the certificate, is displayed in trade for extra coupons.
Talking about Coupons, all the bonds don’t need to have a coupon rate. Some bonds work. Some bonds work on the concept of zero-coupon rate.
A zero-coupon bond comprises no coupons and thus consists of a 0% coupon rate. The bondholder is only paid a single payment of face time value before the date of maturity of the bond.
Main Differences Between Bond Yield and Coupon Rate
- Bond Yield stands for the rate of return on a bond, whereas the coupon rate shows the interest that is to be received by the bondholder annually.
- The Bond Yield is calculated by the formula: (Coupon amount/Price). On the other hand, the coupon rate is calculated by (Total sum of the coupon rates/Face value of the bond).
- A bond needs to have a yield, but a band doesn’t need to have a coupon rate. In this case, a zero-coupon rate system is used on the bond.
- If a bond is purchased at a reduction, the yield turns out to be greater than the coupon rate. In the case of premium, the yield is inferior to the coupon rate.
- Historically, the sum of all the coupon rates together was known as bearer certificates, whereas this was not the case with bond yield.
Conclusion
Finance might seem to be a complex sector, but it indeed has a lot to offer. When it comes down to a bond, Bond Yield and Coupon rate play an important role. The term Bond Yield represents the return rate of a bond, whereas the Coupon Rate is the interest rate that the bondholder receives annually. A zero-coupon bond consists of no coupons and has a 0% coupon rate.
The Bond Yield can be easily calculated by the formula: (Coupon amount/Price), whereas the coupon rate is calculated by the formula: (Total sum of the coupon rates/Face value of the bond). To calculate the yield on a bond, one can divide the coupon amount by the face value upon maturity. Also, the sum of coupon rates when added together is known as a Coupon.
References
- https://www.jstor.org/stable/2353247
- https://www.tandfonline.com/doi/abs/10.1080/09603100801964370