How does a bond issuer decide on the appropriate coupon rate to set on its bonds

Question

How does a bond issuer decide on the appropriate coupon rate to set on its bonds? Explain the difference between the coupon rate and the required return on a bond. Are they any circumstances under which an investor might be more concerned about the nominal return on an investment than the real return? Companies pay rating agencies such as DBRS to rate their bonds, and the costs can be substantial. However, companies are not required to have their bonds rated in the first place; doing so is strictly voluntary. Why do you think they do it? Canada bonds are not rated. Why? Often, junk bonds

Explanation / Answer

When Bonds are issued, they are entered into an underwriting agreement. Generally such underwriter fixes the bonds coupon rate considering the factors

Coupon Rate :

It is the annual interest for the investment paid over the life of the bond. It is calculated by multiplying the Coupon rate with the face value of the bond.

Required return on the Bond :

It is the rate of return fixed by the market to maintain the value of investment, It is the interest rate expected by the investor considering all the factors like risk, coupon payment offered by other bonds, interest rates offered on alternative investments etc.

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