SHARETIPSINFO >> Articles Directory >>Coupon rate – Meaning and importance of coupon rate in Indian stock market
If the interest rate is expressed as a percentage of principal amounts, it will be referred to as coupon rate. This is also called as coupon yield. Here the interest rate from bond or income is often expressed in terms of face value of the asset. There are great differences between a bond and a stock. In stock, you will receive profit once the company males profit. But with bonds, your benefit from the company when it makes profits will not be direct. He will only receive a return on the bonds. This return will be a fixed one.
With bonds you will receive a return whether the company makes profit or not. This will never affect the investment you have made. The result is that the bond return rate will be expressed as a percentage of the bond offer. This percentage is known as coupon rate. This means that coupon rate is the interest paid out by a particular bond. It is closely related to the nominal interest rate of the bond.
Bonds are non volatile. The only changes can happen in the interest rate of the bond. Hence the coupon rate will remain fixed from the time the bond is issued. The coupons rate of a bond that you are going to sell will be the same that you got when you bought the bond. You will have to pay the bond back to the bond-holder on the day when your bond gets matured. The date of maturity along with the amount when it matures can affect the sale price of the bond.
Once the investment is made, the maturity value of the bond is evaluated. The amount of the bond has to be paid back to the investor. Then coupon rate will be the amount that a bond holder receives as a percentage of the investment amount. The new bonds will receive a higher interest rate when the current interest rate rises. This makes a situation that the bonds with lower coupon rate will not have any value for competition. This mainly happens due to the lack of interest from the part of the investor to get a lower coupon rate bond. They will try to buy it only if the cost is less. That means that a higher interest rate relate to lower value for the bonds. IF the interest rate falls, the value of the coupon will increase. There will be investors to buy the bonds paying such high rates.
If the coupon rate is higher for a bond, the yield also will be higher. The word coupon is related to this rate because bonds came as physical certificates having bond coupons with them. The investors receiving a fixed income will take these coupons from the bonds. They will then take it to the bank for making it cash. Hence the name retained and is even now used though the rate is also known by other names.
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