Howdy Wall St. Willy! We talked about Coupon and Yield of a bond separately, but what’s the difference between the two of them anyway?
Coupon or coupon rate is the rate of interest paid by the bond issuer. It is expressed as a percentage of the face value or the par value of the bond.
Yield or yield rate is the rate of return you can get if you buy the bond at the current market price.
Can coupon rate and yield be the same at any time?
If the current market price of the bond is the same as it’s par value, then the coupon rate and the yield would be the same.
Well, how do coupon and yield change with the price of the bond?
The coupon rate is fixed and is not dependent on the price of the bond.
If the current market price of the bond is less than the par value, then, the yield will be higher than the coupon. And, if the current market price is more than the par value, the yield will be lower than the coupon.
For example, let’s say the par value of the bond is $100 and the coupon rate is 10%. So the coupon payment is $10.
If the current market price is $80, the yield will be $10/$80, which is 12.5%, compared to the coupon rate which is only 10%.
Yield = $10/$80 = 12.5%
But, if the current market price is $125, the yield will be $10/$125, which is 8%, compared to the coupon rate of 10%.
Yield = $10/$125 = 8%
Well, I’ve also heard the term yield to maturity, or YTM. Is that the same as the yield we just talked about?
No. The yield we discussed right now is the current yield of the bond. Yield to maturity, or YTM is different. But, that’s a topic for another time.
Thank you very much for telling me about the difference between the yield and the coupon of a bond, Wall St. Willy.
You are welcome, Sooper Cooper. Remember, Finance is Your Friend!