Question

What factors would increase the coupon rate required on a bond?

Answer 1

Higher the risk, higher the required return. Any factor that increases the risk of a bond would increase the coupon rate demanded by investors because of the additional risk borne by them.

The factors that would increase the coupon rate required on a bond are :

• Bonds are unsecured
• The financial ratios of the issuer (such as interest coverage ratio, leverage ratios etc.) are not good
• The credit rating of the issuer or the specific issue is low
• The company does not have a very good credit history
• Longer term bonds require higher coupon rates because of maturity risk