Coupon vs Yield of a Bond for Kids and Teens
This video performs a coupon vs yield comparison for bonds in a simple, concise way for kids and beginners. It could be used by kids & teens to learn about the differences between coupon rate and yield of a bond, or used as a money & personal finance resource by parents and teachers as part of a Financial Literacy course or K-12 curriculum.
Suitable for students from grade levels:
- Middle School
- High School
The topics covered are:
- What is the coupon rate of a bond
- What is Yield
- How is yield different from coupon rate
- Coupon vs yield: Which is more useful
Old Version:
- Difference between Coupon and Yield of a bond
- Can coupon rate and yield be the same
- Coupon and yield changing with the price of the bond
- Is Yield to Maturity (YTM) the same as the yield
What is the coupon rate of a bond?
A bondโs coupon rate is the annual interest paid to the bondholder by the issuer, expressed as a percentage of the bond’s face value.
It is determined when the bond is first issued, and usually remains constant throughout the life of the bond.
What is Yield?
Yield is the rate of return a bond generates.
Current Yield is the annual coupon payment expressed as a percentage of the current market price of the bond. It fluctuates as the price of the bond changes.
Yield to maturity (YTM) is the average return of the bond over its remaining lifetime.
This takes into account all coupon payments, as well as the difference between the bond’s purchase price and its face value at maturity.
Coupon vs yield: How is yield different from coupon rate?
Coupon rate represents the fixed annual interest rate that the bond issuer pays. Yield represents the actual rate of return for the bondholder.
When the bond is first issued, coupon rate and yield are the same since the market value is equal to the face value of the bond.
Coupon rate remains fixed throughout the life of the bond, but yield changes as the market value of the bond changes.
So if you buy a bond at a discount, the yield will be higher than its coupon rate. On the other hand, if you buy the bond at a premium, its yield will be lower than its coupon rate.
Coupon vs yield: Which is more useful?
Although coupon rate is important, yield is a more accurate metric of what an investor can earn by purchasing a bond.
The coupon rate tells what’s promised at the time of issuing, but the yield tells what an investor can actually earn.
If an investor buys a bond at the time of issue and holds it until maturity, coupon rate is the only thing that matters – yield can fluctuate throughout the life of the bond but it will have no impact on the investor.
And the investor can be assured of a steady stream of income in the form of fixed coupon payments, unaffected by market changes.
But for anyone seeking capital appreciation, buying bonds from the secondary market at a price different from face value, or selling it before maturity, yield is what matters since it is a more accurate measure of their actual returns.
Yield can also be used to compare the returns across bonds – the one with a higher yield is the better investment.
Old Version: Coupon vs Yield for a Bond
Howdy Wall St. Willy!
We talked about Coupon and Yield of a bond separately, but…
Coupon vs yield: Whatโs the difference between Coupon and Yield of a bond?
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 itโs par value, then the coupon rate and the yield would be the same.
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, letโs 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%
Is Yield to Maturity (YTM) the same as the yield?
Well, Iโve 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, thatโs 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!
Podcast: Coupon vs Yield for a Bond
Fun, informative and concise episodes by a 10-year old, breaking down complex financial concepts in a way that kids and beginners can understand. Episodes cover personal finance topics like saving, investing, banking, credit cards, insurance, real estate, mortgage, retirement planning, 401k, stocks, bonds, income tax, and more, and are in the form of a conversation between a cowboy (a finance novice) and his friend, a stock broker. Making finance your friend, only at Easy Peasy Finance.
A little bit about me: I have been fascinated with the world of personal finance since I was 6! I love to read personal finance books, and keep myself updated on the latest by reading various personal finance magazines. My friends often ask me questions about finance because they find it complex and intimidating. Thatโs what inspired me to start my YouTube channel called Easy Peasy Finance when I was 8, and this podcast 2 years later.
All you need to know about Coupon Rate vs Yield comparison for a Bond: What is the difference between coupon and yield of a bond, Can coupon rate and yield be the same at any time, How do coupon and yield change with the price of the bond, Is yield to maturity or YTM the same as the current yield, and more.
Show notes and transcript at: https://www.easypeasyfinance.com/comparison-coupon-rate-vs-yield-for-a-bond/
