Coupon Equivalent Rate - CER

A given bond has a coupon. It pays, say, $60 a year for a $1,000 par bond, or 6 percent. That 6 percent is its coupon.

So then...what's an equivalent rate?

Well, let's say the bond went up to $1,200 par, i.e. the creditworthiness of the issuer got better, and investors bid up that bond's price. It still pays $60 a year, only now that rate is 5% of the $1,200. The new coupon is 5%. So what would be an equivlaent rate? Like...find another bond that pays a coupon, equivalent to that 5%.

And this can get complex in a mathy way, because bonds bought at a discount, for example, not only pay their coupons, but also pay interest along the way.

Say a similar bond fell in price to $800, but paid only 4%. Well, depending on when it came due (let's say it's 5 years from now), not only would investors get its 4% or $40 a year in interest (note that its yield is much higher if investors paid $800 for it), but they'd also get an appreciation of the bond of $200 / 5 year = $40 a year in addition to the coupon or interest.

So this concept basically equates other factors in bond calculation to try and dial in the real total coupon, keeping apples being compared with other apples, and not kumquats or prunes or something.

Equivalency. Just Shmoop it.