A coupon rate is a rate at which the interest payment of a bond is made to the investor. It represents the yearly interest rate paid by the bond with respect to its face value denoted as a percentage.
The coupon rate is like fixed income security for governments in which the issuer of the bond receives the annual interest payments.
Let’s understand with the help of an example given below:
Assume that a particular company issues a bond with a face value of Rs. 20,000. The rate of interest on this bond is set at 20% per annum. Here, the 10% per annum is called the coupon rate. So, when investing Rs. 20,000 in the bond, they will receive Rs. 4,000 per annum as interest payments.
The yield to maturity is the return rate that investors hold while holding the bond until maturity. The yield to maturity becomes relevant only when an investor purchases the bond from the secondary market.
The formula for calculating the yield of maturity of a bond is:
YTM = {(Annual Interest Payment) + [(Face Value – Current Trading Price) ÷ Remaining Years To Maturity]} ÷ [(Face Value + Current Price) ÷ 2]
Let’s understand with the help of an example given below:
An investor has a bond with a face value of RS 10,000 and a coupon rate of 10%. Let’s assume that the bond is trading on the market currently at RS 9,200.
Say five years are remaining for the bond’s maturity to get over, with interest being paid out two times in a single year.
The yield of maturity of such a bond is given below:
{(1,000) + [(10,000 – 9,200) ÷ 5]} ÷ [(10,000 + 9,200) ÷ 2] = 0.1208 or 12.08%
The major difference between coupon rate and yield of maturity is that coupon rate has fixed bond tenure throughout the year. However, in the case of the yield of maturity, it changes depending on several factors like remaining years till maturity and the current price at which the bond is being traded.
Here’s another example that clearly tells the difference between coupon rate and yield of maturity. Assume that there’s a bond with a face value of RS 20,000 with a 20% coupon rate.
Let’s look at how coupon rate and yield of maturity reacts in different situations:
Purchase of Bond At  Coupon Rate  Yield To Maturity 










The above example shows the inverse relationship between yield to maturity and the price of the bond.
Here’s look at the other major differences between coupon rate and yield of maturity:
SR No  Coupon Rate  Yield of Maturity 

























A coupon rate is a rate at which the interest payment of a bond is made to the investor. It represents the yearly interest rate paid by the bond with respect to its face value denoted as a percentage.
The yield to maturity is the return rate that investors hold while holding the bond until maturity. The yield to maturity becomes relevant only when an investor purchases the bond from the secondary market.
The major difference between coupon rate and yield of maturity is that coupon rate has fixed bond tenure throughout the year. However, in the case of the yield of maturity, it changes depending on several factors like remaining years till maturity and the current price at which the bond is being traded.
Conclusion
The purpose of this distinction between coupon rate and yield of maturity is to clear the terms for those who have some or limited experience in the financial industry.
These two major terms, coupon rate and yield of maturity, are commonly known while managing or operating bonds.
Moreover, combining these will help you reap returns and translate into the concept higher coupon rate, which means higher yield.
Apart from the usage in bonds, both terms are quite different from each other.