The stated rate of return on bonds without accounting for any compounding. Because bonds nearly always pay interest twice a year, the coupon-equivalent yield must be compounded semiannually to produce the effective annual yield, a measure used by many banks in advertising certificates of deposit. For example, a 12% coupon, $1,000 principal amount bond pays $60 in interest each six months, resulting in an effective yield of 12.36% because the first $60 payment each year can be reinvested to earn an additional $3.60 during the latter half of the year.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.