What is the difference between a bonds yield to maturity and its coupon rate?

What is the difference between a bond's yield to maturity and its coupon rate Introduction: The Bond Market and Its Metrics Hello and welcome! The bond market is a vast ecosystem, offering a range of investment opportunities. But to navigate it effectively, one must understand the key metrics associated with bonds. Today, we'll focus on yield to maturity and coupon rate, two metrics that play a pivotal role in bond valuation and investment decisions. Defining Coupon Rate: The Fixed Interest Component Let's start with the coupon rate. When you purchase a bond, you essentially lend money to the issuer, who promises to pay you back the principal amount at maturity. However, in the interim period, the issuer pays you periodic interest, known as the coupon. The coupon rate is the annual interest rate expressed as a percentage of the bond's face value. For instance, if a bond has a face value of $1,000 and a coupon rate of 5%, the issuer will pay $50 as interest annually. Understanding Yield to Maturity: The Comprehensive Return While the coupon rate provides clarity on the periodic interest, it doesn't capture the complete picture. That's where yield to maturity (YTM) comes in.