Difference Between Coupon Rate and Interest Rate

Coupon Rate vs Interest Rate
 

Coupon Rate and Interest Rate are two financial terms used by investors, particularly in purchasing and managing investments which make it necessary to know the difference between coupon rate and interest rate. Sometimes people use these two terms interchangeably, but the area and the situation of its use are different from each. Coupon rate that is particularly associated with fixed income securities is the rate at which the investors are being paid relative to the par value of the security. On the other hand, interest rate is the percentage at which a lender is charged from the borrower for an amount of money lent or for the use of an asset. Both of these rates are expressed as an annual percentage to the value of the principal.

What is Coupon Rate?

Coupon Rate is the yield that is being paid off for a fixed income security like bonds. This rate usually represents as an annual payment paid by the issuing party considering the face value or principal of the security. Issuer is the one who decides this rate. On the other hand, this is the rate at which the issuing party promises to the investor to pay during the term of the investment.

Coupon rate of a bond can simply be calculated by dividing the sum of coupon payments by the face value of a bond. As an example, if the face value of a bond is $100 and the issuer pays an annual coupon payment of $6, the coupon rate of that particular bond can be identified as 6%. Therefore, the investors always prefer to invest in the bonds that have a higher coupon rate as it is more desirable than the once with lower coupon rates.

What is Interest Rate?

Interest rate is the percentage charged by a lender from a borrower for the amount that has been lent or for the use of assets. This rate will be decided upon the riskiness of the lending party by the borrower. The interest rate is also expressed as an annual percentage of the principal amount.

The interest rate can be calculated by dividing the amount of interest by the value of the principal. As an example, if a bank has lent $ 1000 to a customer and charges $120 for a year as the interest, the rate of interest would be 12%.

What is the similarity between Coupon Rate and Interest Rate?

• The investors use both concepts in making their investment decisions.

• Both are generally expressed as annual percentages.

What is the difference between Coupon Rate and Interest Rate?

• Coupon Rate is the yield of a fixed income security. Interest rate is the rate charged for a borrowing.

• Coupon Rate is calculated considering the face value of the investment. Interest rate is calculated considering the riskiness of the lending.

• Coupon rate is decided by the issuer of the securities. Interest rate is decided by the lender.

Summary:

Coupon Rate vs Interest Rate

Coupon rate of a fixed term security such as bond is the amount of yield paid annually that expresses as a percentage of the par value of the bond. In contrast, interest rate is the percentage rate that is charged by the lender of money or any other asset that has a financial value from the borrower. The main difference is that the decider of these rates; the coupon rate is decided by the issuer whereas the interest rate is decided by the lender. Both of these rates are expressed as annual percentages, but the situations that they use are particularly different.