What is the Difference Between Yield and Coupon?

The difference between yield and coupon lies in the income generated by a bond and how it is calculated. Here are the key differences:

1. Coupon Rate: The coupon rate is the stated periodic interest payment due to the bondholder at specified times. It is expressed as a percentage of the bond's face value and remains fixed throughout the bond's tenure. For example, a bond with a 6% coupon rate and a face value of $1,000 pays $60 in interest annually.
2. Yield: The yield is the anticipated rate of return from the coupon payments alone, calculated by dividing the annual coupon payment by the bond's current market price. The yield can be measured in different ways, such as current yield, which compares the coupon rate to the current market price of the bond, and yield to maturity (YTM), which represents the average return of the bond over its remaining lifetime.

Key points to remember:

• The coupon rate is fixed, while the yield is a derivative calculation based on the bond price.
• The yield to maturity (YTM) considers factors such as the bond's current price, the time until maturity, the bond's coupon rate, and the difference between the price and face value.
• When the bond's price changes and is no longer offered at par value, the coupon rate and the yield will no longer be the same.

In summary, the coupon rate is the fixed interest payment made by the bond issuer to the bondholder, while the yield is the rate of return generated by the bond, taking into account its current market price and other factors.

Comparative Table: Yield vs Coupon

The main difference between yield and coupon lies in their definitions and how they affect the bond's market price. Here is a table summarizing the key differences between yield and coupon:

In summary, yield is the actual return an investor earns from holding a bond for a year, while coupon is the stated interest rate payable each year. Yield can change over time, while coupon rates are fixed for the entire duration of the bond. The inverse relationship between coupon rate and yield affects the bond's market price and how investors perceive its value.