Definition
Coupon and Yield (Bonds)
A bond's coupon is its fixed interest rate on face value, while yield is the actual return based on the price you pay, which moves inversely to price.
The coupon is the annual interest a bond pays on its face value (a 7% coupon on a ₹1,000 bond pays ₹70 a year). The yield, however, depends on the market price: buy that bond below face value and your effective yield exceeds 7%; buy above and it's less.
This is why bond prices and yields move inversely: when interest rates rise, existing bond prices fall (and yields rise) to stay competitive. The benchmark 10-year G-Sec yield is a key indicator watched by equity investors too, as it shapes the cost of capital and market valuations.
Related terms
- Face ValueFace value (par value) is the nominal value of a share as stated by the company, often ₹1, ₹2 or ₹10.
- Equity Risk PremiumThe equity risk premium is the extra return investors expect from stocks over risk-free assets, compensating for higher risk.
- Repo RateThe repo rate is the interest rate at which the RBI lends short-term money to commercial banks, and it is the central bank's main tool to balance inflation and growth.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.