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Your Money: Know how bonds get their coupon rates

The bids will be ranked in ascending order.By Sunil K. ParameswaranBonds are typically issued as par, and hence the coupon rate should be set so that it reflects prevailing market conditions. This is because, for a bond to trade at par, the coupon must be equal to its yield to maturity. The coupon of a corporate bond will be higher than that on a comparable government bond, because of the default risk that is inherent in the former. The investment bank that is handling the issue will advise the company on the coupon to be set.Market clearing yieldFor government securities,…

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