Distinction Between Rate of Interest and Interest Yield

Every loan arrangement has following clearly specified:

1. The loan amount or principal or face value;
2. The rate of interest or coupon rate;
3. Frequency of payment of interest – quarterly or half yearly or annually;
4. Repayment terms, including:

• The date of repayment or redemption or maturity;
• Weather repayable in one shot (bullet repayment) or installments;
•  If repayable in installments:

• Frequency;

• The quantum or amount payable;

‘Rate of Interest’ is the rate at which the borrower agrees to pay interest on the loan amount or principal outstanding or the face value of the instrument.

Where the loan or loan instrument, namely bond is not tradable then the investor has no option but to hold the instrument till maturity. The borrower will repay the face value in full. During the loan period the investor will receive the interest at the specified rate of interest. In this case there is question of yield or we can express the same thing in another way that the rate of interest and yield are one and the same.

Bond Example

When a company borrows through marketable securities like bonds, interest yield comes into play, because the bond can be purchased at a price more or less than the face value. Interest yield, therefore is the rate of interest actually earned by the investor on the amount invested. Following example makes the aforesaid amply clear:

Example Showing Interest Yield

In conclusion, ‘Rate of Interest’ is the specified rate of interest on the face value of the loan or bond, whereas ‘Interest Yield’ is the rate of interest actually realized on the amount really paid for purchasing the bond in the open market.