A weighted average coupon is a calculation that determines the average interest rate paid on a bond over its life. Multiply the coupon rate with its proportionate years to maturity; do this for each individual coupon, then divide the total by the total years to maturity. For instance, a bond with a $100 face value, a 5% coupon rate, and a 10-year maturity would have a weighted average coupon of 5%.
Understanding the weighted average coupon is crucial for bond investors as it provides valuable insights into the overall return and risk associated with a bond investment. Its significance lies in providing a more accurate representation of the actual return investors can expect over the bond’s lifetime, considering the time value of money.