Relationship between coupon rate required return and bond price

Since investors always want a higher yield, they will pay less for a bond with a coupon rate lower than the prevailing rates. So they are buying it at a discount to make up for the lower coupon rate. Said another way, if a bond that is trading on the market is currently priced higher than its original price its par value , it is called a premium bond.

Conversely, if a bond that is trading on the market is currently priced lower than its original price its par value , it is called a discount bond. So, a premium bond has a coupon rate higher than the prevailing interest rate for that particular bond maturity and credit quality. A discount bond by contrast, has a coupon rate lower than the prevailing interest rate for that particular bond maturity and credit quality. An example may clarify this concept. When you sell it, your bond will be competing on the market with new bonds with a 5-year maturity, since five years is the time left until your bond matures.

Because of this bidding-up process, your bond will trade at a premium to its par value. Login Newsletters. 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.

Key Takeaways Coupon rates are influenced by government-set interest rates. In addition, a bond's designated credit rating will influence its price and it can happen that when looking at a bond's price, you will find it does not honestly show the relationship between other interest rates and the coupon rate at all.

To understand the full measure of a rate of return on a bond, check its yield to maturity.

Compare Investment Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. Related Articles. Fixed Income Essentials Current yield vs yield to maturity.

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Fixed Income Essentials When is a bond's coupon rate and yield to maturity the same? Treasury Bonds How is the interest rate on a treasury bond determined? Fixed Income Essentials Yield to Maturity vs. This has been a guide to the Coupon Rate vs Interest Rate. Here we discuss the top differences between Coupon Rate vs Interest Rate along with infographics and comparison table.

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