What is the Difference Between Coupon Rate and Interest Rate?

The main difference between coupon rate and interest rate lies in the context in which they are applied. Here are the key differences:

1. Context: Coupon rate refers to the yield on a fixed-income security, such as a bond, and is calculated on the face value of the bond. On the other hand, interest rate is the rate charged by a lender to a borrower for the borrowed amount.
2. Calculation: Coupon rate is calculated on the face value of the bond, and it is mostly influenced by the government-set interest rate. In contrast, interest rates are determined by various factors, such as the borrower's creditworthiness, market conditions, and government policies.
3. Flexibility: Coupon rates can vary depending on the type of bond and the market conditions. In contrast, interest rates are generally more static during the tenure of the loan.
4. Purpose: The coupon rate is the periodic interest payment made by the bond issuer to the bondholder. The interest rate is the cost of borrowing money, whether it is for personal loans, mortgages, or business loans.
5. Relationship with Bond Price: If a bond's coupon rate is higher than the prevailing market interest rate, the bond's price rises, and if the coupon is lower, the bond's price falls. The coupon rate influences the bond's price by affecting its competitiveness and value in the open market.

In summary, the coupon rate is the annual interest rate paid by a bond issuer on the bond's face value, while the interest rate is the rate charged by a lender to a borrower for the borrowed amount. The coupon rate is influenced by the government-set interest rate, while interest rates are determined by various factors. Coupon rates can vary depending on the type of bond and market conditions, while interest rates are generally more static during the loan's tenure.

Comparative Table: Coupon Rate vs Interest Rate

The main difference between coupon rate and interest rate lies in the fact that the coupon rate is the actual interest paid by the bond issuer to the bondholder, while the interest rate is the rate charged by the lender to the borrower for the borrowed amount. Here is a table highlighting the key differences between coupon rate and interest rate:

In summary, the coupon rate is the fixed interest payment on a bond, while the interest rate is the amount charged by a lender to a borrower for a loan. The coupon rate is determined by the bond issuer and remains the same throughout the bond's life, whereas the interest rate is determined by the lender and can change over time based on various factors.