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Coupon rate


coupon rate

is fixed all through the bond's maturity, a bondholder is stuck with receiving comparably lower interest payments when the market is offering a higher interest rate. Conversely, if prevailing interest rates fall below the coupon rate the bond is paying, then the bond increases in value (and price) because it is paying a higher return on investment than an investor could make by purchasing the same type of bond now, when. Such bonds make only one payment: the payment of the face value on the maturity date. A bond issuer decides on the coupon rate based on prevalent market interest rates, among others, at the time of the issuance.

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Federal Open Market Committee (fomc). 1,200 face value 1,000 bond price 200 return on investment when the bondholder is paid the face value amount at maturity 200 20 return on the 1,000 purchase price. The bond sells at a discount if its market price is below the par value, and in such a situation, the yield to maturity is higher than the coupon rate. Once set at the issuance date, a bond's coupon rate remains unchanged, and holders of the bond receive fixed interest payments at a predetermined time frequency. This is the effective return called yield to maturity. Thus, bonds with higher coupon rates provide a margin of safety against rising market interest rates.



coupon rate

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