Calculated Coupon Rate
What is a Coupon Rate?
The Coupon Rate is the nominal yield paid by a fixed-income security (such as a bond). It represents the annual interest payment that the bondholder receives from the bond's issue date until it matures. This rate is expressed as a percentage of the bond's face value (also known as par value).
Unlike the Yield to Maturity (YTM) or Current Yield, the Coupon Rate typically remains fixed throughout the life of the bond, regardless of changes in the market interest rates or the bond's trading price in the secondary market.
Coupon Rate = (Annual Coupon Payment / Face Value) × 100
How to Use This Calculator
This financial tool is designed to help investors and students quickly determine the nominal rate of return on a bond based on its structure. Here is how to interpret the inputs:
- Bond Face Value (Par Value): This is the amount the bond issuer promises to repay bondholders at maturity. It is typically $1,000 for corporate bonds or $100 for some government bonds.
- Total Annual Coupon Payment: This is the total dollar amount of interest paid per year. If a bond pays semi-annually, you must sum both payments to get the annual figure.
Example Calculation
Imagine you are analyzing a corporate bond with a Face Value of $1,000. The bond indenture states that it pays $45 in interest every year.
Using the formula:
Coupon Rate = ($45 / $1,000) × 100 = 4.5%
This means the bond has a 4.5% coupon rate. Even if the bond trades on the market for $950 or $1,050 later, the coupon rate technically remains 4.5% based on its original par value.
Coupon Rate vs. Current Yield
It is crucial not to confuse the Coupon Rate with the Current Yield. The Coupon Rate is based on the Face Value, while the Current Yield is based on the Market Price.
- Coupon Rate: Indicates the contractual interest obligation of the issuer.
- Current Yield: Indicates the return an investor gets if they buy the bond at today's specific market price.
If a bond is trading at a discount (below par), the Current Yield will be higher than the Coupon Rate. Conversely, if it trades at a premium (above par), the Current Yield will be lower.