Yield vs Coupon Rate

When it comes to investment, finance, stocks, bonds or banking, there are a lot of industry-specific terms which are often confusing for those who do not have a financial background. Fortunately, information is easily accesible so you can just as easily go online and search for the difference between two terms.

Here, we will have a quick, basic definition of two finance-related terms: yield rate and coupon rate. What are the differences and similarities between the two? Read on to find out.

First, let’s talk about yield. This is a particularly important field to learn about if you are planning to buy a new bond and keep it to maturity. Basically, you need to learn about changing prices, interest rates and yields so that you can keep up with your own investment. The simple definition of a yield on a bond is its annual return which is mainly affected by the price a buyer pays for it. if you are a buyer, you would naturally look for a high-yielding bond.

The coupon rate, on the other hand, is the annual coupon amount divided by the face value of the bond. Let’s say that you have a bond issued at $1,000 and the coupon is $50. The coupon rate is 5%. Remember that there is also such a thing as a zero coupon bond, which means that there is no interest to be reinvested. In this case, the entire return comes from the difference between the purchase price and the bond’s actual or face value.

So how are the two terms related? Again, taking the $1,000 bond as an example – if the coupon rate is 5%, it will pay off $50.00 per year. The rule of thumb to follow is that the higher the coupon rate, the higher the yield – so make sure to always look for high coupon rate, high-yield bonds.