I just bought a bond and I was expecting a 9% coupon, but the bond page is showing around 8.5%. Did I miss something, or is there an error?
did you check if it’s the gross or net coupon? Sometimes there’s a difference in the way it’s displayed.
Not sure, where do I check that? I just looked at the main page.
Could be that the coupon rate shown is the net after any TDS deductions, but it should be mentioned clearly. If it’s listed as gross, then the actual amount paid will be lower.
Also, remember that the coupon rate is fixed, but the yield you actually get will depend on the price you pay for the bond. If you bought at a premium, the yield could be lower than the coupon rate.
Wait, so the price I paid affects what I actually get from the bond?
Yeah, the bond’s yield is based on the price at which you enter. If you pay more than the face value, your effective return will be lower than the coupon.
You’re probably looking at the coupon rate, which is set at the time of issuance. But if you buy later, it’s all about the price you pay.
Oh, so I need to factor in the price I bought it at, not just the coupon.
Exactly, that’s the whole point of the yield. If you pay a premium, your yield will drop, even though the coupon stays the same.
So, you’re actually getting a slightly lower return because of the premium you paid.
Got it now! I was thinking I’d get 9% no matter what.
Yup, that’s the trap people fall into. It’s about the bond price you pay, not just the coupon.
Thanks, everyone. I was completely missing that.