Coupon rate vs interest rate
The table is based on the assumption of semiannual interest payments and bonds selling at their maturity face value. Because of the mathematics of the relative change, the gains are always larger than the losses for the same interest rate change.
Both of these interest rate changes are a bit on the high side but not impossible, and the gains and losses are large because the bond maturity is so long. You can see from the table that the lower-coupon bond at the same maturity has greater price volatility. A higher coupon rate for the same maturity would result in smaller but still very significant price changes. If you are concerned about the price volatility of a portfolio of bonds, such as a bond mutual fund, you can use the portfolio's average maturity and the average coupon rate for a rough idea of the price volatility of the overall portfolio.
For mutual funds, this information can be found using simple arithmetic and the information on the fund's portfolio composition contained in the fund's annual, semiannual and quarterly reports.
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The volatility indicated will be only a rough idea of what to expect, because the mutual fund portfolio manager may lengthen or shorten the average maturities over time in anticipation of interest rate changes. However, the mutual fund's investment objective statement found in the prospectus generally restricts major changes in maturity.
There are also some important qualitative factors that affect bond price changes. The table details price changes for bonds generically. The realities of the marketplace are that when interest rates rise, lower-rated bonds—those with higher default risks—tend to fall faster in price. This distinction holds for corporate and municipal bonds alike, but is obviously not relevant for U.
A rise in interest rates in a deteriorating economic environment would drop the price of a low-rated bond—a high-yield junk bond—much faster than the price of a triple-A-rated corporate bond of the same maturity. The table should give you a feel for bond price volatility without going through the actual math of calculating bond price changes. Even though a bond you hold may not have the exact coupon or maturity combination found in the table, you can "eyeball" the table for a useful estimate of bond price change in the event of interest rate changes.
A look at the table should leave you with the notion that, if you want to be conservative and risk-averse, you should stick with short-term bonds and bond funds. If you feel that you can forecast the direction of interest rates—and, keep in mind, even Alan Greenspan's record was spotty—then an expectation of interest rate declines should trigger a move into longer-term, lower-coupon investments and an expectation of rising rates should trigger a move into shorter-term higher-coupon issues.
And remember, transaction costs and tax considerations alone make bond interest rate anticipation switches costly. Jim, most bonds pay a fixed amount of interest, so the interest payments you receive aren't affected by the bond price. Yield, which calculates the interest payment in relation to the bond's price, does change, but not the actual interest payment made. 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.
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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.
Coupon Rate vs Interest Rate | Top 6 Best Differences (With Infographics)
Interest rate is the rate charged for a borrowing. Interest rate is calculated considering the riskiness of the lending. Interest rate is decided by the lender. 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. Unsourced material may be challenged and removed.
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Bond Debenture Fixed income. Accrual bond Auction rate security Callable bond Commercial paper Consol Contingent convertible bond Convertible bond Exchangeable bond Extendible bond Fixed rate bond Floating rate note High-yield debt Inflation-indexed bond Inverse floating rate note Perpetual bond Puttable bond Reverse convertible securities Zero-coupon bond.
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