A bond's coupon rate (sometimes abbreviated simply to "coupon") isn't affected by its price. However, the coupon rate🦋 influences the b𓆉ond's price, by influencing the bond's competitiveness and value in the open market.

How Bond Coupon Rates Work

A bond's coupon rate denotes the amount of annual interest paid by the bond's issuer to the 澳洲幸运5官方开奖结果体彩网:bondholder. Set when a bond is issued, coupon interest rates are determined as a percentage of the bond's par value, also known as the "澳洲幸运5官方开奖结果体彩网:face value." A $1,000 bond has a face value of $1,000. If its coupon rate is 1%, that means it pays $10 (1% of $1,000) a year.

Coupon rates are largely influenced by prevailing national government-controlled interest rates, as reflected in government-issued bonds (like the United States' 澳洲幸运5官方开奖结果体彩网:U.S. Treasury bonds). This means that if the minimum interest rate is set at 5%, no new Treasuries may be issued with coupon rates below this level. However, preexisting bonds with coupon rates higher or lower than 5% may still be bought and sold on the secondary market.

When new bonds are issued with higher inꦆterest rates, they are automatically more valuable to investors, because they pay more interest per year, compared to pre-existing bonds. Given the choice between two $1,000 bonds selling at the same price, where one pays 5% and the other pays 4%, the former is clearly the wiser option.

Coupon Interest Rate vs. Yield

Most bonds have fixed coupon rates, meaning that no matter what the 澳洲幸运5官方开奖结果体彩网:national interest rate may be—and regardless of market fluctuation—the 𒐪annual coupon payments remain static. For instance, a bond with a $1,000 face value and a 5% coupon rate is going to pay $50 in interest, even if the bond price climbs to $2,000, or conversely drops to $500.𓂃

But if a bond's 澳洲幸运5官方开奖结果体彩网:coupon rates are fixed, its yiel☂ds are not. There are several types of bond yields, but one of the most relevant is the effective or 澳洲幸运5官方开奖结果体彩网:current yield. Current yield is derived by dividing a bond's annual coupon payments—that is, the interest the bond is paying—by its 澳洲幸运5官方开奖结果体彩网:current price. This calculation results in the actual return an investor realizes on that bond—its effective interest rate, in effect.

Say that a $1,000 face value bond has a coupon interest rate of 5%. No matter what happens to the bond's price, the bondholder receives $50 that year from the issuer. However, if the bond price climbs from $1,000 to $1,500, the 澳洲幸运5官方开奖结果体彩网:effective yield on that bond changes from 5% to 3.33%.

Conversely, if the bo𒉰nd price falls to $750, the effective yield is 6.67%.

General interest rates substantially impact stock investments. But this is no less true with bonds. When the prevailing market rate of interest is higher than the coupon rate—say there's a 7% interest rate and a bond coupon rate of just 5%—the price of the bond tends to drop on the open market because investors don't waꦫnt to purchase a bꦐond at face value and receive a 5% yield, when they could source other investments that yield 7%.

This drop in demand depresses the bond price towards an equilibrium 7% yield, which is roughly $715, in the case of a $1,000 face value bond. At $715, the bond's yield is competitive.

Conversely, a bond with a coupon rate that's higher than the market rate of interest tends to rise in price. If the general interest rate is 3% but the coupon is 5%, investors rush to purchase the bond, in order to snag a higher investment return. This increased demand causes bond prices to rise until the $1,000 face value bond sells for $1,666.

Other Impacts on Bond Prices

In reality, bondholders are as concerned with a bond's yield to maturity, especially on non-callable bonds such as U.S. Treasuries, as they are with current yield because bonds with shorter maturities tend to have smaller discounts or premiums.

The 澳洲幸运5官方开奖结果体彩网:credit rating given to bonds also largely influences the price. It's possible that the bond's price does not accurately r൩eflect the relationship between the coupon rate and other interest rates.

Because each bond returns its full par value to the bondholder upon maturity, investors can increase bonds' total yield by purchasing them at a below-par price, known as a discount. A $1,000 bond purchased for $800 generates coupon payments each year, but also yields a $200🉐 profit upo𝔉n maturity, unlike a bond purchased at par.

The Bottom Line

The prevailing market interest rates affect the coupon rate of a bond, and this, ultimately, affects the price of the bond. As a rule of thumb, if a coupon rate is higher than the prevailing market interest rate, the bond's price rises; if the coupon is lower, the bond's price falls. Besides the prevailing interest rates, other factors that affect a bond's price are yield and the bond's rating.