How does Coupon rate work on Bonds ?
So with the help of this coupon you’ll get some extra income on your bond. For example, lets say you’ve bond of $1000 with the coupon of 8% then it’ll pay you additional $80 a year. But depends of the policy payment might be semiannually or trimonthly as I said earlier.
How do Coupon rate calculated for Bonds ?
You can easily get the rate of coupon by dividing the sum of the security’s annual coupon payment by the bond’s par value. For example bond issued with the value of $1000 and pays $50 coupon semi-annually would have a coupon rate of 10%.
i.e, ($50 + $50/$1000)*100% = 10% which is the coupon rate here.
And that’s why bonds with higher coupon rates are more desirable for any of the investors than those with lower rates. The coupon rate is nothing but the yield of the bond paid on its issue date and this yield will change according to the value of the bond, thus giving the bond’s yield to maturity.
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