Another name for the Coupon rate on a Bond is:
Select one:
a. Interest Yield
b. Implied Equity Premium
c. Stated Rate
d. Starting Rate
The correct answer and explanation is:
The correct answer is c. Stated Rate.
The coupon rate of a bond refers to the fixed annual interest rate that the bond issuer agrees to pay to the bondholder. This rate is expressed as a percentage of the bond’s face value, and the bondholder receives periodic interest payments based on this rate until the bond matures.
The coupon rate is often called the stated rate because it is explicitly stated when the bond is issued. It is not affected by changes in market interest rates, though the bond’s price in the secondary market may fluctuate depending on the prevailing interest rates. However, the coupon payment itself remains constant throughout the life of the bond.
To better understand this, consider an example. Suppose a bond has a face value of \$1,000 and a coupon rate of 5%. This means the bondholder will receive \$50 annually (5% of \$1,000). The coupon rate is stated upfront and does not change over time.
While the coupon rate is often referred to as the stated rate, it is distinct from other terms related to bond yield, such as interest yield or yield to maturity (YTM). The interest yield generally refers to the bond’s return relative to its price, which can fluctuate based on market conditions. Implied equity premium refers to the difference in returns between equities and bonds, while the starting rate could refer to various initial rates in different contexts but is not commonly used as a synonym for coupon rate.
Therefore, the coupon rate’s alternative name is stated rate because it is the fixed rate promised to the bondholder at the time the bond is issued.