You can buy a bond either from the issuer when it is issued for the first time at face value or from the secondary market after issuance at the market price.
The return you will earn from the bond will depend on when you bought it and at what price.
The coupon rate is the promised specified interest rate that an issuer pays at specified intervals (usually annually) throughout the bond’s tenure.
The bond yield is the return that a bondholder will earn from holding a bond, and it depends on the bond market price at which it was bought.
The bond yield is calculated using the formula: (Annual coupon amount / Bond market price) X 100
For example, if a bond is trading at a current price of Rs. 99 and the annual coupon amount is Rs. 7, the bond yield will be 7.07%.
The bond yield helps an investor make an informed decision about whether to proceed with the investment or not, and it helps compare the bond instrument with other similar bond investment opportunities available in the market.
Along with bond yield, an investor must calculate the yield to maturity (YTM) that gives the total annualised return.
