Bond Pricing - Why are there two rates? Interest and Yield

Question

For my accounting course, we're learning about bonds.

I'm confused to as why there is two rates we're dealing with when it comes to bonds? Where does this yield rate come from?

The bond buyers are getting an interest payment, but they also demand yield rates?

Answer 1

When the company sells its bonds, they try to set the coupon rate (interest rate - say for example 5%) so the bonds sell at par ($100). However, the bonds may get priced at a discount (say $99) or at a premium ($101). Also even if they are able to sell at par with the progress of time due to the change in market interest rates, the bond may start trading at a discount or par.

If you happened to own the bond in this example, then you will be entitle to a interest of $5 per year paid semi-annually.

If you had bought the bond at par your yield would then be 5/100 = 5%

If you had bought the bond at a discount your yield would then be 5/99 = 5.05%

If you had bought the bond at a premium your yield would then be 5/101 = 4.95%

So there you have it - the two different rates

Answer 2

the interest rate is the rate the interest accrues at, the yeild is what you will acctually get when the interest compounds for instince if you have 100 dollars and you accrues 1 dollar of interest a month you would have 112 dollars after a year if the interest doesn't compound, however if it does compound than after one month the interest would accrue on 101 and you would earn more the a dollar for instince 1.01 and then next month the interst would accrue on 102.01 and so on so at the end you will have 115 ( these numbers are all abitrary no real math involved with them I just used the to illistrate my point)