What is the Difference Between Yield to Maturity and Coupon Rate?
🆚 Go to Comparative Table 🆚The primary difference between yield to maturity and coupon rate is that the coupon rate has a fixed bond tenure throughout the year, whereas the yield to maturity keeps changing depending on multiple factors, such as the current price at which the bond is being traded and the remaining years till maturity.
- Coupon Rate: This is the amount paid to the bondholder by the issuer until its date of maturity. It represents the annual interest amount that the bond owner will receive. The coupon rate is fixed over the lifetime of the bond.
- Yield to Maturity: This is the total return earned by the investor until the bond's maturity. It is the percentage rate of return for a bond, assuming that the investor holds the asset until its maturity date and receives all its remaining interest payments. The yield to maturity reflects the bond's changing value in the secondary market.
In summary:
- The coupon rate is the fixed interest payment made to the bondholder annually.
- The yield to maturity is the estimated total rate of return of a bond, assuming it is held until maturity, and takes into account the bond's current market price and remaining interest payments.
- The coupon rate remains constant throughout the bond's lifetime, while the yield to maturity changes depending on factors such as the current price of the bond and the remaining years until maturity.
Comparative Table: Yield to Maturity vs Coupon Rate
The main difference between yield to maturity (YTM) and coupon rate lies in their definitions, how they are calculated, and how they change over time. Here is a table summarizing the differences between the two:
| Feature | Coupon Rate | Yield to Maturity |
|---|---|---|
| Definition | The coupon rate is the interest rate paid annually on the bond's face value. | The yield to maturity is the estimated annual rate of return for a bond, assuming that the investor holds the asset until its maturity date and reinvests the payments at the same rate. |
| Calculation | Calculated by dividing the annual coupon payment by the bond's face value. | Calculated by discounting the bond's future payments (coupon payments and face value at maturity) using a single discount rate, creating a present value that is approximately equal to the bond's current market price. |
| Fixed or Variable | The coupon rate is fixed for the entire duration of the bond. | The yield to maturity changes depending on factors like the current market price of the bond and the remaining years till maturity. |
| Investor Perspective | Bond investors are more likely to base their decisions on a bond's coupon rate, as it represents the annual income they can expect to receive while holding the bond. | Bond traders are more likely to consider a bond's yield to maturity, as it reflects the bond's changing value in the secondary market and incorporates potential gains or losses caused by market fluctuations. |
In summary, the coupon rate is the annual interest payment made to bondholders, while the yield to maturity is the estimated annual rate of return for a bond held until maturity. The coupon rate is fixed, while the yield to maturity changes based on market conditions and the bond's current market price.
- Yield vs Coupon
- Current Yield vs Yield to Maturity
- Coupon Rate vs Interest Rate
- Dividend vs Dividend Yield
- Yield vs Return
- Discount Rate vs Interest Rate
- Callable vs Convertible Bonds
- Treasury Bills vs Bonds
- Cash Rate vs Interest Rate
- Money Market vs Capital Market
- Cost of Capital vs Rate of Return
- Variable vs Fixed Interest Rate
- Long-term vs Short-term Interest Rates
- Exchange Rate vs Interest Rate
- Stocks vs Bonds
- Lending Rate vs Borrowing Rate
- Bond vs Loan
- Compound Interest vs Simple Interest
- Atom Economy vs Percentage Yield