Coupon Rate Formula (Table of Contents)
- Coupon Rate Formula
- Examples of Coupon Rate Formula (With Excel Template)
- Coupon Rate Formula Calculator
Coupon Rate Formula
Coupon Rate is the interest rate that is paid on a bond/fixed income security. It is stated as a percentage of the face value of the bond when the bond is issued and continues to be the same until it reaches maturity. Once fixed at the issue date, coupon rate of bond remain unchanged till the tenure of the bond and the holder of the bond gets the fixed value of interest at fixed predetermined time intervals.
Coupon Rate is calculated by dividing Annual Coupon Payment by Face Value of Bond, the result is expressed in percentage form.
The formula for Coupon Rate –
Below are the steps to calculate the Coupon Rate of a bond:
Step 1: In the first step, the amount required to be raised through bonds is decided by the company, then based on the target investors (i.e. retail or institutional or both) and other parameters face value or par value is determined as a result of which, we get to know the number of bonds that will be issued.
Step 2: In the second step, firstly amount of interest and frequency of payment is decided, and the total annual interest payment is calculated by multiplying the amount of interest with the frequency of payment.
Step 3: In the final step, the amount of interest paid yearly is divided by the face value of a bond in order to calculate the coupon rate.
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Examples of Coupon Rate Formula (With Excel Template)
Let’s take an example to understand the calculation of the Coupon Rate formula in a better manner.
Coupon Rate Formula – Example #1
Company ABC issued a bond of Rs. 100 Face Value and Rs. 10 as half-yearly interest.
Solution:
Annual Interest Payment is calculated using the formula given below
Annual Interest Payment = Amount of Interest * Frequency of Payment
- Annual Interest Payment = 10 * 2
- Annual Interest Payment = Rs. 20
Coupon Rate is calculated using the formula given below
Coupon Rate = (Annual Coupon (or Interest) Payment / Face Value of Bond) * 100
- Coupon Rate = (20 / 100) * 100
- Coupon Rate = 20%
Now, if the market rate of interest is lower than 20% than the bond will be traded at a premium as this bond gives more value to the investors compared to other fixed income securities. However, if the market rate of interest is higher than 20%, then the bond will be traded at discount.
Coupon Rate Formula – Example #2
L&T Finance issued secured NCDs in March 2019. Following are the details of the issue:
- NCD Issue Open: 06 March 2019
- NCD Issue Close: 07 March 2019
- NCD Issue Size: Rs.1500 Crore
- Price Band/Face Value/Issue Price: Rs.1000
- NCD’s: 15,000,000 of Rs.1000 Each
- Listing: BSE, NSE
- Credit Rating: IndRA AA/Stable, CARE AA/ Stable, ICRA AA/Stable
- Interest Payment: Rs. 7.225
- Frequency of Payment: Monthly
Solution:
Annual Interest Payment is calculated using the formula given below
Annual Interest Payment = Amount of Interest * Frequency of Payment
- Annual Interest Payment = 7.225 * 12
- Annual Interest Payment = Rs. 86.7
Coupon Rate is calculated using the formula given below
Coupon Rate = (Annual Coupon (or Interest) Payment / Face Value of Bond) * 100
- Coupon Rate = (86.7 / 1000) * 100
- Coupon Rate= 8.67%
Coupon Rate Formula – Example #3
Tata Capital Financial Services Ltd. Issued secured and unsecured NCDs in Sept 2018. Details of the issue are as following:
- NCD Issue Open: 10 Sept 2018
- NCD Issue Close: 21 Sept 2018
- NCD Issue Size: Rs. 2000 Cr with an option to retain oversubscription up to limit of Rs. 7,500 Cr
- Price Band/Face Value/Issue Price: Rs.1000
- NCD’s: 2,00,00,000 of Rs.1000 Each
- Listing: BSE, NSE
- Credit Rating: CRISIL AAA/Stable, CARE AAA/ Stable
- Interest Payment
- For Secured NCD: Rs. 89
- For Unsecured NCD: Rs. 91
- Frequency of Payment: Annual
Solution:
Annual Interest Payment is calculated using the formula given below
Annual Interest Payment = Amount of Interest * Frequency of Payment
For Secured NCDs
- Annual Interest Payment = 89 * 1
- Annual Interest Payment = Rs. 89
For Unsecured NCDs
- Annual Interest Payment = 91 * 1
- Annual Interest Payment = Rs. 91
Coupon Rate is calculated using the formula given below
Coupon Rate = (Annual Coupon (or Interest) Payment / Face Value of Bond) * 100
For Secured NCDs
- Coupon Rate = (89 / 1000) * 100
- Coupon Rate= 8.9%
For Unsecured NCDs
- Coupon Rate = (91 / 1000) * 100
- Coupon Rate= 9.1%
As we know, an investor expects a higher return for investing in a higher risk asset. Hence, as we could witness in the above example, unsecured NCD of Tata Capital fetches higher return compared to secured NCD.
Explanation
Coupon Rate of a bond is determined after considering various factors, but two of the key factors are interest rates of different fixed income security available in market at the time of issue of bond and creditworthiness of the company.
The coupon rate of a bond is determined in a manner so that it remains competitive with other available fixed income securities. However, the coupon rate of newly issued fixed income securities may increase or decrease during the tenure of a bond based on market conditions, which results in the change in the market value of a bond. Market Value of a bond is a derivation of difference in coupon rate of bond and market interest rate of other fixed income securities. If interest rate of a bond is below the market interest rate, the bond is said to be traded at discount, while if the interest rate of bond is higher than market interest rate, the bond is said to be traded at premium and similarly, a bond is said to be traded at par if interest rate of bond is equal to market interest rate.
The coupon rate is also depended on the creditworthiness of the company. Companies need to undertake credit rating of the bond from a credit rating agency before issuing of the bond. Credit rating agencies assign a credit rating to the bond issue after assessing the issuer on various parameters riskiness of the business in which company operates, financial stability, legal history, default history, ability to repay money borrowed through bond etc. Credit Rating hierarchy starts from AAA and goes up to D, with ‘AAA’ being most safe and ‘D’ being Default. Generally, bonds with a credit rating of ‘BBB-and above are considered investment grade. Higher the rating of a bond means higher safety and hence lower coupon rate and vice versa.
Relevance and Uses of Coupon Rate Formula
Coupon Rate Formula helps in calculating and comparing the coupon rate of differently fixed income securities and helps to choose the best as per the requirement of an investor. It also helps in assessing the cycle of interest rate and expected market value of a bond, for eg. If market interest rates are declining, the market value of bonds with higher interest rates will increase, resulting in higher yield and hence higher return on investment and vice versa in increasing market interest rate scenario.
Coupon Rate Formula Calculator
You can use the following Coupon Rate Calculator
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