Sometimes the terms ‘coupon’ and ‘yield’ are used interchangeably while referring to the payout from a bond. However, the two shouldn’t be mixed up. A coupon is the annual interest payment offered by a bond issuer. Yield, on the other hand, is the payout which is considered with reference to the market price of a listed bond.
Coupon and effective yield
For example, if a bond has a coupon of 8% per annum, it means that the annual interest is 8% of the invested amount. This can be paid out monthly, quarterly, annually or cumulatively at the end of the bond tenure. Yield is what a bond earns, expressed as a percentage of its value.
