Bond market rate vs coupon rate

What does Coupon Rate mean?

This differs from the market interest rate of a bond, which is a fluctuating value that generally reflects market sentiment. Unlike the coupon rate, the market interest rate of a bond can swing drastically during the lifetime of the bond.

For example, in a scenario where experts are predicting economic inflation, the market interest rate for the bond may rise due to the fact that investors will expect more cash to offset the decrease in the value of the currency at large. Generally speaking, if a market interest rate exceeds a coupon rate, the value of the bond will likely drop.

Fixed rate bond

Once a bond issuer has set a coupon rate and a face value, the bond issuer logically wishes to obtain the highest possible market price for the bond issue. Typically, private companies will hire an investment bank to underwrite the bond issue. The investment bank, or syndicate of multiple investment banks, will purchase the entire bond issue and resell the bonds to large-scale and institutional investors on the open market. Many governmental entities, such as the United States Treasury, will sell bonds directly to large-scale investors through auctions rather than using an underwriter as a middleman.

The interest rate does not depend on the issue price or market value; it is already being decided by the issuing party. The market interest rates have effects on the bond prices and yield, wherein the increase in the market interest rates will reduce the fixed-rates of the bond. Shorter maturity of the bond reduces the coupon rate. Longer maturity duration increases the interest rates which affects the interest amount. Shorter maturity duration reduces the risk of interest rates. Types Coupon can be of two types Fixed rate and Variable rate.

Fixed rate does not change and fixed till maturity while the variable rate changes every period.

Market Interest Rates and Bond Prices | AccountingCoach

Interest rate does not have any types and is fixed until the regulatory body decides to change it. Final Thought If the investor intends to hold the bond to maturity, the day to day fluctuations in the bonds price may not be that important. The bonds price will change but the stated interest rate will be received.

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On the other hand, instead of holding the bonds until maturity the investor can sell the bond and reinvest the money or the proceeds into another bond that pays a higher coupon rate. This has been a guide to the Coupon Rate vs Interest Rate.

How the Coupon Interest Rate of a Bond Affects Its Price

Here we discuss the top differences between Coupon Rate vs Interest Rate along with infographics and comparison table. You may also have a look at the following articles —. Your email address will not be published. Save my name, email, and website in this browser for the next time I comment. Free Investment Banking Course.

Conversely, yield to maturity will be higher than the coupon rate when the bond is purchased at a discount. The Balance uses cookies to provide you with a great user experience. By using The Balance, you accept our.

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Bond Investing Basics. By Thomas Kenny. Continue Reading.