Could you please explain the difference between yield and coupon - ProProfs Discuss

# Could you please explain the difference between yield and coupon rate?

Asked by Liliana, Last updated: Jun 17, 2024

#### John Smith

John Smith

The coupon rate is usually fixed and represents the interest payment the issuer makesto the investor each year until the bond matures. the coupon rate is always calculatedagainst the face value of a bond. for example, if the bond has a face value of \$100,then the interest payment each year would total \$11.50. usually, bonds make semiannualpayments. as such, every 6 months, the issuer in this case would pay theinvestor \$5.75 until the bond matures.the yield is the return on the bond based on two factors: the interest received eachyear, and the theoretical gain or loss on the bond based on the difference betweentodays purchase price and the maturity price of the bond.if interest rates go up, the price of bonds go down. if you buy a bond where the priceis lower than the maturity value, you would have a capital gain over time if you held thebond to maturity. when you factor in this capital gain with the interest income, you endup with a yield that is higher than the coupon rate.if interest rates go down, the price of the bond goes up. if you buy a bond where theprice is higher than the maturity value, you would have a capital loss over time if youheld the bond to maturity. when you factor in this capital loss with the interest income,you end up with a yield that is lower than the coupon rate.