Hi guys, what would be the difference between yield and coupon rates? I always thought that coupon rates were yearly return rates and yield was the lifetime return but is this wrong?
Bond Coupon vs. Bond Yield
Technical terms surrounding bonds are numerous and can sometimes be confusing. Below we have defined the terms surrounding the different bond yields.
Coupon Rate on Bonds Definition
The coupon rate of a bond represents the amount of actual interest that is paid out on a bond relative to the principal value of the bond (par value). Finding the coupon rate is as simple as dividing the coupon payment during each period divided by the par value of the bond. This is often referred to as the stated rate.
Bond Yields Explained
The term bond yield can reference several different metrics - most notably the yield to maturity formula and the current yield calculation.
Bond Yield to Maturity Formula
A bond's yield to maturity estimates the bond's overall return assuming that the bond is held to maturity. It is often thought of as the effective rate of return. Overall, it accounts for the capital gains (or losses) that occur when you buy a bond at a discount or pay a premium to par as well as the interest payments that are collected.
It can equal the coupon rate when the current value of the bond is equal to the par value of the bond.
Bond Current Yield Calculation
The current yield looks at the annual interest payment / current bond price. This calculation is used to give an approximate look at the return on a bond if you were to hold it for a year.
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