Coupon yield
Also written Nominal yield
The coupon payment expressed as a percentage of face value — the nominal interest payable on a fixed income security, fixed at issue and unaffected by what the bond later trades at.
In plain language
A bond promises a rupee amount of interest each year. The coupon yield simply restates that promise as a percentage of the bond's face value.
Because face value never changes, neither does the coupon yield. A 8.24% government security pays Rs 8.24 per Rs 100 of face value on the day it is issued and on every coupon date until it matures, whatever the market price does in between.
That fixedness is both its use and its limitation. It tells you what the issuer owes. It does not tell you what you will earn, because you did not necessarily pay Rs 100 for it.
How it works
Three yields measure a bond, and they differ only in what sits in the denominator and how much of the return is counted.
- Coupon yield divides the coupon by the face value. Fixed for life.
- Current yield divides the same coupon by the market price. It moves every day the bond trades.
- Yield to maturity discounts all the cash flows — every coupon and the redemption of principal — back to the market price, and so is the only one of the three that captures a capital gain or loss on maturity.
The relationship between them is mechanical and is a standard exam table:
| Bond selling at | Relationship |
|---|---|
| Par | Coupon rate = Current yield = YTM |
| Discount | Coupon rate < Current yield < YTM |
| Premium | Coupon rate > Current yield > YTM |
The logic is one sentence: a bond bought below par pays back more at maturity than you paid, so the full-return measure must be the largest of the three; above par, the reverse.
The total return from a bond actually has three sources — the coupons, any capital gain or loss when the bond is sold or matures, and income from reinvesting the coupon payments. The workbook notes that Excel's XIRR silently assumes reinvestment at the rate the formula itself produces.
The formula
Coupon yield = Coupon payment / Face value
Current yield = Coupon payment / Market price
A worked example
The workbook's own illustration, on a government security:
| Input | Value |
|---|---|
| Coupon | Rs 8.24 |
| Face value | Rs 100 |
| Market value | Rs 103.00 |
Coupon yield = 8.24 / 100 x 100 = 8.24%
Current yield = 8.24 / 103 x 100 = 8.00%
The bond is trading at a premium, so the table holds: coupon rate 8.24% > current yield 8.00% > YTM, which must be lower still because the buyer paid Rs 103 for something that will redeem at Rs 100.
Scale it. An investor buys Rs 25,00,000 face value of this security at Rs 103.
Amount invested = 25,00,000 x 103/100 = Rs 25,75,000
Annual coupon = 25,00,000 x 8.24% = Rs 2,06,000
Current yield = 2,06,000 / 25,75,000 = 8.00%
Redemption at par = Rs 25,00,000
Capital loss held to maturity = Rs (75,000)
The coupon yield says 8.24%. The investor's cash return on money actually laid out is 8.00%, and once the Rs 75,000 capital loss at redemption is spread over the remaining life, the true return — the YTM — is lower again.
Three different answers to "what does this bond yield", all correct, all measuring different things.
Why NISM asks about it
Chapter 9 (Investing in Fixed Income Securities), section 9.4 on yield measures, where coupon yield opens the list before current yield, YTM, yield to call and yield to put. The coupon rate / current yield / YTM relationship table is one of the most reliably examined items in the paper, and the Rs 8.24 illustration is the workbook's own.
Common exam traps
- Face value in the denominator, not market price. Coupon yield divided by market price is the current yield, and the two are equal only when the bond trades at par.
- Coupon yield never changes. If a question shows it moving with the market price, it is describing current yield.
- Learn the discount and premium orderings as one line each. Discount: coupon < current < YTM. Premium: coupon > current > YTM. Reversing them is the single most common loss of a mark in this chapter.
- Only YTM captures the capital gain or loss on redemption. Current yield ignores it entirely.
- Coupon rate and coupon yield are the same number on a bond quoted per Rs 100 of face value. The workbook uses both phrasings.
- Total return has three components — coupons, capital gain or loss, and reinvestment income. A question asking for the sources of return from a bond wants all three.
- All yield and price formulas work on the clean price, so a question that hands you a settlement amount including accrued interest needs that stripped out first.
Where this is taught
Free preparation for NISM Series X-ARelated terms
- Current yieldA bond's annual coupon in rupees divided by its current market price — the cash income the bond throws off this year, ignoring any gain or loss at redemption.
- Yield to MaturityThe single discount rate at which a bond's future coupons and redemption amount add up to exactly its market price today — the return you actually earn if you hold it to maturity.
- Government SecurityA tradeable debt instrument issued by the Central Government or a State Government — treated as free of default risk, and the benchmark against which other rupee interest rates are priced.
- Coupon rateThe rate of interest a bond pays, applied to its face value and never to its market price — which is why the coupon tells you the cash flow but not the return.
- Dirty priceThe clean price of a bond plus the interest accrued since the last coupon date — what a buyer settling between coupon dates actually pays the seller.
- Effective yieldThe annual rate that would leave an investor with the same amount after one year as the quoted nominal rate does once its more frequent interest payments are taken into account.