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Bond Yields Template Excel Workout
Bond Yield Rate vs. Coupon Rate
May 20, 2025
What is a Coupon Rate?
A coupon rate is the annual interest rate paid by the bond issuer to the bondholder. It is expressed as a percentage of the bond’s face value (par value). For example, if a bond has a face value of $1,000 and a coupon rate of 5%, the bondholder will receive $50 annually as interest.
What is a Bond Yield Rate?
A bond yield rate, on the other hand, refers to the return an investor can expect to earn if the bond is held until maturity. It takes into account the bond’s current market price, its coupon payments, and the time remaining until maturity. The yield rate can vary depending on the bond’s price fluctuations in the market.
Key Learning Points
- A coupon rate is the annual interest rate paid by the bond issuer to the bondholder, expressed as a percentage of the bond’s face value
- Bond yield rate refers to the return an investor can expect to earn if the bond is held until maturity – this factors in the bond’s current market price, coupon payments, and the time until maturity
- While the coupon rate is fixed and determined at the time of issuance, the bond yield rate can change based on market conditions and the bond’s price
- When the coupon rate of a bond is higher than its yield, it means that the bond is trading at a premium
Bond Yield Rate vs. Coupon Rate
Coupon Rate
A coupon rate is the regular payment received by the bondholder. It is always fixed and is the annual interest rate paid by the bond issuer to the bondholder, expressed as a percentage of the bond’s face value. For example, if a bond has a face value of $10,000 and a coupon rate of 5%, the bondholder will receive $500 annually as interest.
The coupon rate for a bond is influenced by the economic situation at the time of issue. If governments are raising interest rates, then bond coupon rates will likely rise to remain an attractive investment choice. At the same time, any existing bonds with a lower coupon rate will then likely fall in price.
Bond Yield Rate
This refers to the return an investor can expect to earn if the bond is held until maturity. When a bond is initially issued, this is usually the same as the coupon rate. However it then takes into account the bond’s current market price, its coupon payments, and the time remaining until maturity. The yield rate can vary depending on the bond’s price fluctuations in the market.
While the coupon rate is fixed and determined at the time of issuance, the bond yield rate can change based on market conditions and the bond’s price.
Bond Yield Example
Let’s look at an example of calculating a bond yield. We are told a bond has a face value of $100 and a coupon rate of 4%. At the time of issue, this bond would have a yield of 4% as well.
If the bond price went up to $103.45 the yield rate would no longer equal the coupon rate of 4% and we need to calculate this.
We’ve been told that there are 5 years to maturity and if the coupon rate is 4% then the coupon per year will be $4.
The formula for calculating a Bond Yield is:
Thus, we can take $4 / $103.45 = 3.87% yield.
Download the free Financial Edge Bond Yield template to practice the correct calculations for this example. This also demonstrates how to use the Rate function in Excel to calculate Yield to Maturity.
What Does It Mean If the Coupon Rate Is Higher Than the Yield?
When the coupon rate of a bond is higher than its yield, it means that the bond is trading at a premium. This means that the buyer is paying more than par value for the bond. (This is the case in our example above.) This occurs because the bond’s fixed interest payments (coupon payments) are more attractive compared to the current market interest rates. Investors are willing to pay more for the bond, driving its price above its face value.
What Is the Difference Between Coupon Rate and Interest Rate?
The coupon rate is the annual interest rate paid by the bond issuer to the bondholder, expressed as a percentage of the bond’s face value. It is fixed at the time of issuance and does not change over the life of the bond. The interest rate, on the other hand, refers to the prevailing market rate at which borrowers can obtain funds. It can fluctuate based on economic conditions, central bank policies, and other factors including government policy.
Conclusion
While the coupon rate of a bond is fixed and determined at the time of issuance, the bond yield rate can fluctuate based on market conditions and the bond’s price. When the coupon rate is higher than the yield, it indicates that the bond is trading at a premium due to its attractive fixed interest payments compared to current market rates. Understanding the differences between these rates is crucial for investors to make informed decisions about bond investments.