what is the difference between a bond's coupon rate and its yield?
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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.
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The yield-to-maturity is the implied market discount rate given the price of the bond. A bond's price moves inversely with its YTM. An increase in YTM decreases the price and a decrease in YTM increases the price of a bond. The relationship between a bond's price and its YTM is convex.
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Effective yield is calculated by dividing the coupon payments by the current market value of the bond. return based on its annual coupon payments and current price, as opposed to the face value. Though similar, current yield doesn't assume coupon reinvestment, as effective yield does.
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Current yield compares the coupon rate to the current market price of the bond. Therefore, if a $1,000 bond with a 6% coupon rate sells for $1,000, then the current yield is also 6%.
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Multiply the bond's coupon rate by its par value to determine its annual interest. In this example, multiply 5 percent, or 0.05, by $1,000 to get $50 in annual interest. Divide the bond's annual interest by its price to convert the price to a yield. In this example, divide $50 by $1,048.90 to get 0.0477.
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The coupon rate or yield is the amount that investors can expect to receive in income as they hold the bond. Coupon rates are fixed when the government or company issues the bond. The coupon rate is the yearly amount of interest that will be paid based on the face or par value of the security.
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Generally, yield is calculated by dividing the dividends or interest received on a set period of time by either the amount originally invested or by its current price: For a bond investor, the calculation is similar.
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The SEC yield is used to compare bond funds because it captures the effective rate of interest an investor may receive in the future. ... The resulting yield calculation shows investors what they would earn in yield over the course of a 12-month period if the fund continued earning the same rate for the rest of the year.
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The lower coupon bond will have a greater percentage change in price from par value than high coupon ones will when market interest rates change. Therefore a bond with lower coupon exhibits a larger percentage change in price for given change in market yield and therefore has MORE INTEREST RATE RISK!
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Bond Yield Rate vs. Coupon Rate: An Overview. A bond's coupon rate is the rate of interest it pays annually, while its yield is the rate of return it generates. ... The par value is simply the face value of the bond or the value of the bond as stated by the issuing entity.
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A par yield is the coupon rate at which bond prices are zero. ... The par yield curve gives a yield that is used to discount multiple cash flows for a coupon-paying bond. It uses the information in the spot yield curve, also known as the zero percent coupon curve, to discount each coupon by the appropriate spot rate.
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When new bonds are issued, they typically carry coupon rates at or close to the prevailing market interest rate. Interest rates and bond prices have an inverse relationship; so when one goes up, the other goes down.
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If a bond's coupon rate is more than its YTM, then the bond is selling at a premium. If a bond's coupon rate is equal to its YTM, then the bond is selling at par.
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One major difference between the bond and stock markets is that the stock market has central places or exchanges where stocks are bought and sold. ... Bonds, on the other hand, are more susceptible to risks such as inflation and interest rates. When interest rates rise, bond prices tend to fall.
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Key Takeaways. Yield is the annual net profit that an investor earns on an investment. The interest rate is the percentage charged by a lender for a loan. The yield on new investments in debt of any kind reflects interest rates at the time they are issued.
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Essentially, a yield is a rate of return an investor will receive by holding a bond until maturity. ... The yield-to-maturity is a discount rate which equates to the present value of future cash flows to current market price.
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As bond prices increase, bond yields fall. For example, assume an investor purchases a bond that matures in five years with a 10% annual coupon rate and a face value of $1,000. ... If interest rates were to fall in value, the bond's price would rise because its coupon payment is more attractive.