What's the difference between "Interest rate" and "coupon rate" (URGENT)?
As I see it the coupon rate or the interest rate is the same thing. That is the rate stated on the face of the bond. This is fixed (usually) for the life of the bond or maybe forever (irredeemable, perpetual. When the bond comes to expiry you get back the face value. You can therefore calculate flat interest or redemption interest.
Okay, now the tricky bit!
The tricky bit is the YIELD.
Now this is variable and is different to different people owning exactly the same bond!
It differs according to the price you pay for the bonds.
So lets say we have ?100 face value of Treasury 10% (coupon) erxpiry 2015
The price of this might be ?120.
We pay ?120 for ?100 of Stock coupon 10%
The yield will be 100/120 x 10=8.33%
So you are getting a return (flat) on your money of 8.33% p.a.
If you are working out a redemption yield you would get 7 years of 8.33% but lose ?20 of capital at the end.
Another way looking at it: Same details as above. Each year you receive an interest payment of ?10 (?100 x 10%) This ?10 as a percentage of your investment is 10/120 x100=8.33%
This is a good question, I will put it on my website: www.shareworld.co.uk
There is a Q&A section and a free answer service for questions like yours.