What Is a Bond Coupon, and How Is It Calculated?

The coupon rate, however, does not change, since it is a function of the annual payments and the face value, both of which are constant. That said, zero coupon bonds carry various types of risk. Like virtually all bonds, zero coupon bonds are subject to interest-rate risk if you sell before maturity. If interest rates rise, the value of your zero coupon bond on the secondary market will likely fall. Long-term zeros can be particularly sensitive to changes in interest rates, exposing them to what is known as duration risk. And while there is little risk of default with Treasury zeros, default risk is something to be mindful of when researching and investing in corporate and municipal zero coupon bonds.

The holder of a coupon bond receives a periodic payment of the stipulated fixed interest rate. The term “yield” is shorthand for the yield-to-maturitywhich takes into account any difference between what is paid for the bond and its value at maturity. The yield on a new bond bought at par is normally the same as the coupon rate. Thereafter, as the general level of interest rates changes, the value of the bond in the secondary market will move in the opposite direction. This relationship can also be expressed between price and yield.

Head to Head Comparison between Coupon Rate vs Interest Rate(Infographics)

To collect an interest payment, the investor has to present the physical coupon. In general, the longer the maturity, the higher the interest rate sensitivity. This means that for a given change in interest rates, everything else remaining the same, the price of a bond with higher maturity will change more compared to another similar bond with lower maturity. This happens because a higher number of cash flows need to be discounted. We know that a bond’s price is inversely related to the yield. How sensitive a bond price is to yield depends on the various features of the bond such as its maturity, coupon rate, and any embedded options in the bond.

A government bond is a bond issued by a national government denominated in the country’s domestic currency. However, the coupon rate is a percentage of the bond’s face value, not the amount the bond was purchased for. The bondholder will therefore earn interest payments of $400 annually, or 4% of $10,000, until the bond matures. Interest payments continue to be paid to the bondholder until the bond matures, and the face value of the bond is returned to the bondholder. If the market interest rate is higher than the coupon interest rate of the bond,… The coupon payment on a bond is the interest payment received by the holder of the bond until the bond matures.

Yield

Investors in sovereign bonds denominated in foreign currency have the additional risk that the issuer may be unable to obtain foreign currency to redeem the bonds. For example, in the 2010 Greek debt crisis the debt was held by Greece in Euros. One proposed solution was for Greece to go back to issuing its own Drachma. Although, government what is a coupon interest rate bonds are usually referred to as risk -free, there are currency, inflation, and default risks for government bondholders. If a bond is issued at a premium, the effective interest rate is most likely _____ the contract interest rate. At maturity, in 20 years, Georgia will receive the nominal value of the bond $1,000 plus the coupon rate.

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