Coupon

Periodic interest payment made to bondholders by the issuer.

A coupon is the annual interest rate paid on a bond, expressed as a percentage of the bond's face value. When an investor buys a bond, the issuer promises to pay this fixed rate of interest periodically—typically semi-annually or annually—until the bond reaches its maturity date, at which point the original principal is also returned. The term originates from the historical practice of physical bond certificates having detachable paper coupons that investors would clip and present to receive their interest payments. While the coupon rate remains fixed throughout the life of most standard bonds, the actual return an investor receives (the yield) will fluctuate based on the bond's market price. If interest rates in the broader economy rise, newly issued bonds will offer higher coupons, causing the price of existing bonds with lower coupons to fall. Conversely, if market rates decline, existing bonds with higher coupons become more valuable, and their market prices rise. Investors care about coupons because they dictate the predictable income stream generated by a fixed-income portfolio. When evaluating coupons, investors must balance the desire for high income against credit risk. High-coupon bonds are often issued by companies with lower credit ratings (high-yield bonds) to compensate investors for the increased risk of default, whereas government bonds or highly rated corporate bonds typically offer lower coupon rates.

An investor purchases a corporate bond with a face value of $1,000 and an annual coupon rate of 5%. The bond pays interest semi-annually. The annual payment is $1,000 0.05 = $50. Because it pays semi-annually, the investor receives two payments of $50 / 2 = $25 each year until maturity.