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. Market Value of a bond is a derivation of difference in coupon rate of bond and market interest rate of other 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. The coupon rate of a bond is determined in a manner so that it remains competitive with other available fixed income securities. ExplanationĬoupon 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. Hence, as we could witness in the above example, unsecured NCD of Tata Capital fetches higher return compared to secured NCD. Credit Rating: CRISIL AAA/Stable, CARE AAA/ StableĪs we know, an investor expects a higher return for investing in a higher risk asset.2000 Cr with an option to retain oversubscription up to limit of Rs. Issued secured and unsecured NCDs in Sept 2018. Credit Rating: IndRA AA/Stable, CARE AA/ Stable, ICRA AA/Stable.Price Band/Face Value/Issue Price: Rs.1000.L&T Finance issued secured NCDs in March 2019. However, if the market rate of interest is higher than 20%, then the bond will be traded at discount. 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. 10 as half-yearly interest.Īnnual Interest Payment is calculated using the formula given belowĪnnual Interest Payment = Amount of Interest * Frequency of PaymentĬoupon Rate is calculated using the formula given belowĬoupon Rate = (Annual Coupon (or Interest) Payment / Face Value of Bond) * 100
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You can download this Coupon Rate Template here – Coupon Rate Template Coupon Rate Formula – Example #1Ĭompany ABC issued a bond of Rs.
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