Question

What is the difference between a bond’s coupon rate and its market interest rate (yield)?

Answer 1

Bond:- A bond is a fixed income instrument that represents a loan made by an investor to a borrower.Bonds are used by companies, municipalities, states, and sovereign governments to finance projects and operations. Owners of bonds are debtholders, or creditors, of the issuer.

Bonds Coupon Rate:- Coupon rate is the rate of interest paid by bond issuer's on the bonds face value. It is the periodic rate of interest paid by bond issuers to purchasers.The coupon rate is calculated on the bonds face value or par value, not on the issue price or market value. A coupon rate is the yield paid by a fixed-income security; a fixed-income security's coupon rate is simply just the annual coupon payments paid by the issuer relative to the bond's face or par value. The coupon rate, or coupon payment, is the yield the bond paid on its issue date. This yield changes as the value of the bond changes, thus giving the bond's yield to maturity. When a bond is issued, it pays a fixed rate of interest called a coupon rate until it matures. This rate is related to the current prevailing interest rates and the perceived risk of the issuer. When you sell the bond on the secondary market before it matures, the value of the bond, not the coupon, will be affected by the then-current market interest rates and the length of time to maturity.

Bonds market interest rate(yield):- A bond's coupon rate is the rate of interest it pays annually, while its yield is the rate of return it generates. A bond's coupon rate is expressed as a percentage of its par value. The par value is simply the face value of the bond or the value of the bond as stated by the issuing entity.

Difference between bonds coupon rate and bonds market interest rate:- Coupon rate is the rate of interest paid by bonus issuers on the bonds face value.The bond issuer pays the interest annually until maturity, and after that returns the principal amount (or face value) also. Coupon rate is not the same as the rate of interest. A bonds coupon rate is the actual amount of interest income earned on the bond each year based on its face value.Wheres, a bonds yield to maturity is the estimated rate of return based on the assumption it is held until maturity data and not called. A bond's coupon rate is the rate of interest it pays annually, while its yield is the rate of return it generates. A bond's coupon rate is expressed as a percentage of its par value. The par value is simply the face value of the bond or the value of the bond as stated by the issuing entity.

Coupon Rate	Interest Rate
Yield of a fixed income security.	Rate charged for a borrowing.
Calculate considering the face value of the investment.	Calculate considering the riskiness of the lending.
Coupon rate is decided by the issuer of the securities.	Interest rate is decided by the lender.