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Coupon

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A coupon refers to the annual interest rate a bond holder is entitled to receive when purchasing a bond. In the past, most bonds had coupons which were physically attached to them. To receive their semi-annual interest payment, every six months, a bond holder would detach a coupon and redeem it for its interest payment. Although this is not the norm today, the term coupon remains. A coupon is expressed as a percentage (i.e. coupon=5.250%). Semi-annual coupon payments are equal the coupon divided by two and then multiplied by the par value of the bond (i.e. face value or principal, not the market value). Unlike the bond yield, which varies with the market value of the bond, coupon payments do not change with market conditions. Coupon payments are fixed and will remain the same until the maturity date of the bond. Although most coupon payments are issued every six months, there are coupon payments paid out at other intervals (i.e. monthly, quarterly or annually). A bond with no coupon is called a zero-coupon bond. Coupon are also referred to as coupon rate.



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