# Coupon Rate - Explained

What is a Coupon Rate?

# What is a Coupon Rate?

A coupon rate refers to the annual interest amount that a bondholder receives usually based on the bonds face value. A coupon rate is the bond interest an issuer pays to a bondholder on its issue date. Any change in the value of the bond changes the yield, a situation that gives yield to maturity of the bond.

## How Does the Coupon Rate Work?

Both government and non-government entities raise money through bonds to fund their operations. When you buy a bond, there is a promise from the bond issuer that he or she will make periodic payments to you as the bondholder. The payment you will receive is, however, based on your bonds principal amount, and at the coupon rate as reflected in the issued certificate. The issuer will pay interest on an annual basis until maturity. Maturity is when you get back your initial investment and the par value of the bond

## How to Calculate Coupon Rate

Generally, investors will always prefer bonds that have a high coupon rate over those with low coupon rates, not unless they are all held equal. To calculate the coupon rate, you first have to divide the sum of the security's yearly coupon payment. You then divide them by the par value of the bond.

## Example of Coupon Rate

Lets assume that Eddie has a 10-year bond of ABC Company with \$10,000 as the nominal value and a maturity period of 20 years. The interest rate is 8% per year. The current yield for the coupon is 5.22%, while 3.85% is the yield to maturity. Now let us find out how much Eddie will receive as his coupon payment. Each bond has a coupon payment of \$1,000x 8/100 = \$80. As a bondholder, Eddie will receive \$80 as his interest payment. Note that the coupon payment Eddie receives is calculated at the interest rate of the bond, and not current yield of the bond. Remember that Eddies bond maturity period is 20 years. So, after the 20 years elapses, Eddie will receive his bonds principal value of \$1,000 with the coupon rate.