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Calculations apply a single discount rate to future payments, creating a present value that will be about equivalent to the bond's price. In this way, the time until maturity, the bond's coupon rate, current price, and the difference between price and face value all are considered. Fixed Income Essentials. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page.
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Popular Courses. Bonds Fixed Income Essentials. Yield to Maturity vs. Coupon Rate: An Overview When investors consider buying bonds they need to look at two vital pieces of information: the yield to maturity YTM and the coupon rate. Key Takeaways The yield to maturity is the estimated annual rate of return for a bond assuming that the investor holds the asset until its maturity date and reinvests the payments at the same rate. The coupon rate is the annual income an investor can expect to receive while holding a particular bond.
At the time it is purchased, a bond's yield to maturity and its coupon rate are the same. Article Sources. Securities and Exchange Commission. Accessed July 19, Fixed Income Essentials. Your Privacy Rights. To change or withdraw your consent choices for Investopedia.
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I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Bonds Fixed Income Essentials. Bond Yield Rate vs. Coupon Rate: An Overview A bond's coupon rate is the rate of interest it pays annually, while its yield is the rate of return it generates.
The yield to maturity becomes relevant only when an investor purchases the bond from the secondary market. The major difference between coupon rate and yield of maturity is that coupon rate has fixed bond tenure throughout the year. However, in the case of the yield of maturity, it changes depending on several factors like remaining years till maturity and the current price at which the bond is being traded.
The above example shows the inverse relationship between yield to maturity and the price of the bond. The purpose of this distinction between coupon rate and yield of maturity is to clear the terms for those who have some or limited experience in the financial industry. These two major terms, coupon rate and yield of maturity, are commonly known while managing or operating bonds.
Moreover, combining these will help you reap returns and translate into the concept higher coupon rate, which means higher yield. Apart from the usage in bonds, both terms are quite different from each other.
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