Investor Corner/The asset classes/Debt Concepts
2.2.2 Face Value, Coupon, and Yield
Face value is what a bond repays at maturity. Coupon is its stated interest rate. Yield is the return you actually earn, which depends on the price you paid, and the three numbers are only identical if you buy at exactly face value.
Three numbers, one bond
A bond with a face value of ₹1,000 and a 7% coupon pays ₹70 a year until maturity, then returns the ₹1,000 principal. If you buy that bond at exactly ₹1,000, your yield equals the coupon, 7%. Bonds rarely trade at exactly face value in the secondary market, which is exactly where yield and coupon start to diverge.
Why price changes the real return
If that same bond can be bought for ₹950 instead of ₹1,000, the fixed ₹70 coupon now represents a higher percentage of what you actually paid, so your yield rises above the 7% coupon. Buy it at ₹1,050 instead, and your yield falls below 7%, because you paid more for the same fixed payments.
The takeaway
Coupon is fixed once a bond is issued. Yield is not; it moves inversely with price every time the bond trades. When comparing bonds, yield is the number that reflects the actual return on offer today, and it is the figure worth focusing on rather than the coupon printed on the certificate.
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