A coupon yield is the amount of interest paid out to investors on bonds as a percentage of the bonds' face values. This interest rate is established at the start of the bond agreement and remains the same for the entirety of the term of the bond. Coupon yield is different from current yield, which is dependent upon a bond's current trading value. For an investor who has already purchased a bond, coupon yield is the ultimate factor that determines how much interest he or she will receive from that bond each year.
Many investors are drawn to bonds because they can provide some stability even when prevailing economic conditions are at their most turbulent. In addition, investors like bonds because they are fixed income instruments, which means they return regular payments to investors. How much payment an investor receives is determined at the start of the bond agreement, which also establishes the length of each bond's term and whether or not it may be redeemed before its term is complete. The coupon yield is the amount that an investor can expect to receive from a bond's regular interest payments.
A bond is essentially a loan from an investor to the institution that issues it. Since investors are taking on the risk that the principal of their bonds might not be returned to them, the bond issuers promise interest payments as a form of compensation. The interest rate is the same as the coupon yield. As the risk of default rises, so too does the interest rate to compensate for that risk.
As an example of how coupon yield works, imagine that an investor purchases a bond with a face value of $1,000 US Dollars (USD) that has a duration of five years. The stated interest rate that the investor will be paid is eight percent, which means that the yield each year will be eight percent of the $1,000 USD. Thus, the investor will receive $80 USD each year as a return on his or her investment. This is in addition to the eventual return of the $1000 USD face value of the bond.
Some bonds trade at prices that are different from their face values. When this occurs, it affects the current yield of the bonds. The current yield is the amount returned each year to investors relative to the bond's current trading price. For those investors who have already purchased a bond, coupon yield is the most important statistic, since it can be depended upon to stay the same for the life of the bond.
