Coupon Rate (bonds)The coupon rate is the interest rate paid on a bond. It is calculated as a percentage of the bond's par value. The term coupon rate is used for historical reasons. Before the computer era, bond holders were give a coupon book used to receive their interest payments. When the time came to receive an interest payment, a coupon would be torn out of the book and presented to the bond issuer for payment. Coupon rate is not the same as yield. Yield is the effective interest rate based on the price of the bond on the secondary markets. Coupon rate is the interest rate based on the original price of the newly issued bond. So, a bond with a face value of $1,000 that pays $40 interest annually has a coupon rate of: $40/$1000 * 100 = 4% If the bond were for sale at a premium on the secondary markets for $1100, the yield would be: $40/$1100*100 = 3.64% As you can see from this example, if a bond sells at a premium on the secondary market the yield will be lower than the coupon rate. However, if bonds sell at a discount, yield will be higher than coupon rate. Bond prices fluctuate opposite to the prevailing interest rates. If interest rates go up, bond prices go down on the secondary markets. If interest rates go down, bond prices go up.
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