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What is a bond's coupon rate and what does it indicate?

Curious about Bonds

What is a bond's coupon rate and what does it indicate?

A bond's coupon rate is the interest rate that the bond issuer promises to pay the bondholder annually. It is typically expressed as a percentage of the bond's face value or par value. For example, a bond with a face value of INR 1,000 and a coupon rate of 5% would pay the bondholder INR 50 in interest every year.

The coupon rate is important because it indicates the amount of income the bond will generate for the investor. If interest rates rise after the bond is issued, the bond's coupon rate becomes less attractive to investors and the bond price may fall. On the other hand, if interest rates fall, the bond's coupon rate becomes more attractive and the bond price may rise.

It's important to note that the coupon rate is different from the yield to maturity, which takes into account the bond's price, the face value, and the time to maturity, among other factors. The yield to maturity represents the total return that an investor can expect if they hold the bond until maturity.

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