Coupon Amount and Coupon Yield
Please note that Coupon amount is the sum of money the bond holder receives as an interest payment at fixed intervals. Coupon Yield is the return that investor receives on his investment.
Coupon Amount = Face Value X Coupon rate
For example, in a 2021 GOI 6.50% security which has a face value of ` 1000, the investor will get the following:
- 1000 x 6.5% = ` 65 annually in the form of ` 32.5 every six months.
- ` 1000 back in 2021.
The Yield of the Bond is denoted as percentage of the Bond’s price at any point of time. It is denoted as following:
Coupon Yield % = (Coupon Amount / Price ) x 100.
In the above example, the face value is equal to the bond value i.e. ` 1000, so the Yield of Coupon will also be same i.e. 6.5%. But if the face value of the Coupon goes down, the coupon yield goes up. For example if we consider that the same bond has a value of ` 800, the yield of Bond will be as follows:
(65/800)x 100 = 8.125%
Similarly, if the value of the bond goes up, say ` 1200, then the Yield of the Bond will be as follows:
(65/1200)X100 = 5.416 %.
- For a given coupon amount, the Yield of the Bond is inversely proportional to its price.
Topics: Banking GK