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Coupon Rate Definition & Example | InvestingAnswers
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Credit Default Swaps Definition: Credit default swaps CDS are a type of insurance against default risk by a particular company. The coupon rate is the yield the bond paid on its issue date. This yield changes as the value of the bond changes, thus giving the bond's yield to maturity. A bond's coupon rate can be calculated by dividing the sum of the security's annual coupon payments and dividing them by the bond's par value.
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All else held equal, bonds with higher coupon rates are more desirable for investors than those with lower coupon rates. The coupon rate is the interest rate paid on a bond by its issuer for the term of the security. The term "coupon" is derived from the historical use of actual coupons for periodic interest payment collections. Once set at the issuance date, a bond's coupon rate remains unchanged and holders of the bond receive fixed interest payments at a predetermined time frequency.
A bond issuer decides on the coupon rate based on prevalent market interest rates, among others, at the time of the issuance. Market interest rates change over time and as they move higher or lower than a bond's coupon rate, the value of the bond increases or decreases, respectively. Changing market interest rates affect bond investment results. Since a bond's coupon rate is fixed all through the bond's maturity, a bondholder is stuck with receiving comparably lower interest payments when the market is offering a higher interest rate.
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