What does a higher coupon rate generally indicate for a bond?

What does a higher coupon rate generally indicate for a bond?

• A. A higher risk of default
• B. A lower market demand for the bond
• C. A higher interest payment to bondholders
• D. A shorter maturity date for repayment

Answer: (C)

A higher coupon rate generally indicates a higher interest payment to bondholders because the coupon rate is the annual interest payment expressed as a percentage of the bond's face value. When a bond has a higher coupon rate, it means that investors will receive greater periodic interest payments throughout the life of the bond. This is often attractive to investors who are seeking income, as it ensures a more substantial return compared to bonds with lower coupon rates. Typically, a higher coupon rate can also signal a few market dynamics. For example, bonds with higher risk profiles often offer higher coupon rates to compensate investors for that risk. Therefore, although higher coupon rates may sometimes correlate with riskier bonds, the definition of the coupon rate itself purely reflects the interest payment structure, making the statement regarding the higher interest payment correct.

A higher coupon rate generally indicates a higher interest payment to bondholders because the coupon rate is the annual interest payment expressed as a percentage of the bond's face value. When a bond has a higher coupon rate, it means that investors will receive greater periodic interest payments throughout the life of the bond. This is often attractive to investors who are seeking income, as it ensures a more substantial return compared to bonds with lower coupon rates.

Typically, a higher coupon rate can also signal a few market dynamics. For example, bonds with higher risk profiles often offer higher coupon rates to compensate investors for that risk. Therefore, although higher coupon rates may sometimes correlate with riskier bonds, the definition of the coupon rate itself purely reflects the interest payment structure, making the statement regarding the higher interest payment correct.