How to Calculate Bond Coupon Rates
Bonds are the debt securities corporations and governments rely on for much of their borrowing. When a bond is sold, the issuer is obligated to redeem the bond for its par value--also called face value--after a specified time period, called the maturity. A bond pays a fixed amount of interest each year, which is called the coupon. The name comes from the fact that in the past, bonds came with a physical coupon the bond owner had to send in to collect the interest earned.
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Instructions
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Determine the coupon rate. The amount of a bond's coupon is determined when the bond is issued. To calculate the coupon rate (that is, the interest rate the bond was originally issued at) divide the coupon amount by the par value of the bond, then multiply by 100 to get the percentage. For example, if a $5,000 bond has a coupon of $375, the interest rate is ($375/$5000)x100, or 7.5 percent.
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Figure the amount of the coupon using the coupon rate. If you know the coupon rate and want to determine the dollar amount of the coupon, simply take the percentage of the coupon rate times the face value of the bond. For example, if the coupon rate is 8 percent and it's a $5,000 bond, the coupon is $400 per year.
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Find the yield of a bond. Bonds are traded securities and their price varies, primarily in response to changes in market interest rates. Let's say you have a bond that is selling for 4,500 even though its par value is $5,000. Assume the bond has a coupon of $375, which is a coupon rate of 7.5 percent. Your yield is the coupon divided by the price you actually paid for the bond, or $4,500. Calculate the yield of a bond by dividing the coupon by the price, tthen multiply by 100 to convert to a percentage. In this example, the bond has a current yield of 8.33 percent.
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Tips & Warnings
When a bond sells for les than par value it is said to be at a discount and the yield is higher than the coupon rate. If a bond is priced at more than the par value it's at a premium and the yield is less than the coupon rate.
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