Most bonds have a clearly stated coupon rate, which is expressed as a percentage. However, calculating the coupon rate using Microsoft Excel is simple if all you
have is the coupon payment amount and the par value of the bond.
What Is the Coupon Rate?
First, a quick definition of terms. A bond’s coupon rate is simply the rate of interest it pays each year, expressed as a percentage of the bond’s par value. (It’s called the coupon rate because, in days of yore, investors actually had possession of physical paper bonds, which had literal coupons attached to them. They’d detach a coupon and turn it into a bank or brokerage to receive their periodic interest payment.) The par value is the bond’s face value, or the amount the issuing entity must pay the bondholder once the bond matures.
The formula for the coupon rate is essentially the bond’s total annual coupon payment divided by its par value:
Some bonds actually pay interest semi-annually or quarterly, so it is important to know how many coupon payments per year your bond generates.
How to Find the Coupon Rate
In Excel, enter the coupon payment in cell A1. In cell A2, enter the number of coupon payments you receive each year. If the bond pays interest once a year, enter 1. If you receive payments semi-annually, enter 2. Enter 4 for a bond that pays quarterly. In cell A3, enter the formula =A1x A2 to yield the total annual coupon payment.
Moving down the spreadsheet, enter the par value of your bond in cell B1. Most bonds have par values of $100 or $1,000, though some municipal bonds have pars of $5,000. In cell B2, enter the formula “=A3/B1” to yield the annual coupon rate of your bond in decimal form.
Finally, select cell B2 and hit CTRL+SHIFT+% to apply percentage formatting.
For example, if a bond has a par value of $1,000 and generates two $30 coupon payments each year, the coupon rate is ($30 x 2) ÷ $1,000, or 0.06. Once the cell format is adjusted, the formula yields a return rate of 6%.