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The coupon rate on a bond is also known as the nominal yield. The interest payments investors get from their bond investments come from the this yield.
This bond interest yield is the rate the issuer pays to par value (amount of bonds owned). It is fixed and never changes during the life of the investment.
The nominal yield is not always your overall rate of return on a security - it usually is not. When someone buys a bond at a premium, their total rate of return will be lower than the coupon rate. Since the interest is only paid to par, the premium (amount above par) is lost over the life of the security. This will give the investor a lower yield to maturity.
Bonds bought at a discount will have a higher YTM, compared to it's nominal.
Bonds with higher coupon rates also get called first, since their interest rate is higher than the market.
Higher bond coupon rates will provide more current income to the investor, so as far as income - higher is better. As far as yield, it is not always better to chase the highest nominal coupon.
Copyright  2006 American Investment Training, Inc.
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