# What Is Coupon Rate and How Do You Calculate It? Formula and Example

Because the borrower must offer a coupon rate that is at least equal to the yield on existing bonds, otherwise there would be no takers. One last thing you should know about zero coupon bonds is the way they are taxed. Therefore, the IRS requires that you pay tax on this “phantom” income each year, just as you would pay tax on interest you received from a coupon bond. For example, if you buy a bond paying \$1,200 each year and you pay \$20,000 for it, its current yield is 6%. While current yield is easy to calculate, it is not as accurate a measure as yield to maturity.

A bond coupon rate can be a nice annual payout for a bond holder. However, it isn’t always as lucrative if you’ve purchased the bond secondhand. If you prize a payout above all else, you may want to consider buying a bond firsthand. If you want to take advantage of market conditions and increase your return, you may want to speak to a financial advisor to make sure you’re getting the best coupon rate possible. Historically, when investors purchased a bond they would receive a sheet of paper coupons. The investor would return these coupons on a regular basis and receive their payment in exchange.

## Key differences between Coupon Rate vs Interest Rate

Let’s look at how these factors influence the impact of interest rate changes on a bond’s price. Federal agencies, municipalities, financial institutions and corporations issue zero coupon bonds. One of the most popular zeros goes by the name of STRIPS.

Interest/ coupon payment frequency There will be no coupon payable on the CPs. It considers that you can achieve compounding interest by reinvesting the \$1,200 you receive each year. It also considers that when the bond matures, you will receive \$20,000, which is \$2,000 more than what you paid.

## Bond Tips

Often they are registered by a number to prevent counterfeiting, but may be traded like cash. Bearer bonds are very risky because they can be lost or stolen. Especially after federal income tax began in the United States, bearer bonds were seen as an opportunity to conceal income or assets. When bonds are bought by investors, bond issuers are contractually obligated to make periodic interest payments to their bondholders. What is the current yield for a bond that has a par value of \$1,000 and a coupon interest rate of 10.95%? Fixed rate bonds pay a fixed interest rate, which does not change once set at the issuance date, taking into account the interest rates at that time.

Investors also consider the level of risk that they have to assume in a specific security. There is no guarantee that a bond issuer will repay the initial investment. Therefore, bonds with a higher level of default risk, also known as junk bonds, must offer a more attractive coupon what is a coupon interest rate rate to compensate for the additional risk. Most investors consider the yield-to-maturity a more important figure than the coupon rate when making investment decisions. The coupon rate remains fixed over the lifetime of the bond, while the yield-to-maturity is bound to change.

## What Does Coupon Rate Mean?

Investors buying the bond on the secondary market, can get a higher return from the bond’s interest payments, as they may be higher than the bond’s coupon rate, giving the bond’s yield to maturity. When investors purchase bonds at face value and are held up to maturity, the interest they will earn on the bonds will depend entirely on the coupon rates, predetermined at the issuance. For those investors that buy bonds on a secondary market, they are likely to earn a higher or lower interest rate from the bond. Generally, investors will always prefer bonds that have a high coupon rate over those with low coupon rates, not unless they are all held equal.

• For a callable bond, the bond can be called back by the issuer.
• The coupons never change, regardless of what price the bond trades for, you will always get \$50 per year.
• Thus, bonds with higher coupon rates provide a margin of safety against rising market interest rates.
• U.S. Yankee bond – a US dollar-denominated bond issued by a non-U.S.
• The coupon rate is recalculated periodically, typically every one or three months.