Investor Corner/The asset classes/Debt Concepts
2.2.2 Face Value, Coupon, and Yield
Face value is what a bond repays at maturity. Coupon is its stated interest rate. Yield is the return you actually earn, which depends on the price you paid, and the three numbers are only identical if you buy at exactly face value.
Three numbers, one bond
A bond with a face value of ₹1,000 and a 7% coupon pays ₹70 a year until maturity, then returns the ₹1,000 principal. If you buy that bond at exactly ₹1,000, your yield equals the coupon, 7%. Bonds rarely trade at exactly face value in the secondary market, which is exactly where yield and coupon start to diverge.
Face value (or par value) is typically ₹1,000 for most Indian bonds. It is the amount the issuer promises to repay at maturity. The coupon rate is the annual interest as a percentage of face value; a 7.5% coupon on a ₹1,000 bond pays ₹75 per year, usually in two semi-annual instalments of ₹37.50. Yield, often called current yield or yield to maturity, reflects the actual return the investor earns based on the price paid, not the face value.
The distinction between coupon and yield is crucial. If a bond with a 7.5% coupon is trading at ₹1,100 (above face value, or at a premium), the current yield is ₹75 / ₹1,100 = 6.8%. The coupon rate has not changed, but the yield to the buyer is lower because they paid more than face value. Conversely, if the same bond trades at ₹900 (at a discount), the current yield rises to 8.3%. This inverse relationship between bond price and yield is the single most important concept in fixed-income investing.
Why price changes the real return
If that same bond can be bought for ₹950 instead of ₹1,000, the fixed ₹70 coupon now represents a higher percentage of what you actually paid, so your yield rises above the 7% coupon. Buy it at ₹1,050 instead, and your yield falls below 7%, because you paid more for the same fixed payments.
When prevailing interest rates in the economy rise, newly issued bonds come with higher coupon rates, making existing lower-coupon bonds less attractive. Their prices fall until their yield matches the new market rate. When rates fall, the reverse happens: existing higher-coupon bonds become more valuable, and their prices rise. This is why bond prices and interest rates move in opposite directions, and it is the mechanism through which RBI rate decisions transmit into the value of debt fund portfolios.
For an investor who buys a bond and holds it to maturity, interim price fluctuations do not affect the final return, which is locked in at the yield to maturity at the time of purchase. But for a debt mutual fund, which marks its holdings to market daily, interim price changes show up directly in the NAV. This is why a short-duration debt fund with low price sensitivity to rate changes can be more appropriate for conservative investors than a long-duration fund, even if the long-duration fund's yield looks higher on paper.
The takeaway
Coupon is fixed once a bond is issued. Yield is not; it moves inversely with price every time the bond trades. When comparing bonds, yield is the number that reflects the actual return on offer today, and it is the figure worth focusing on rather than the coupon printed on the certificate.
How PriLytics helps. PriLytics tracks the real value and return on every debt instrument you hold, computed from what you actually paid rather than the headline coupon alone. See holdings and returns.
When evaluating debt funds, look at the portfolio's weighted average yield to maturity (reported in the monthly factsheet) rather than past returns. Past returns reflect rate movements that may not repeat; the portfolio YTM gives a better forward-looking estimate of what the fund is likely to earn if interest rates stay roughly where they are.