Coupon

Loading the player...

What is a 'Coupon'

The annual interest rate paid on a bond, expressed as a percentage of the face value. 

It is also referred to as the "coupon rate," "coupon percent rate" and "nominal yield."

BREAKING DOWN 'Coupon'

For example, a $1,000 bond with a coupon of 7% pays $70 a year. Typically these interest payments will be semiannual, meaning the investor will receive $35 twice a year. 

Because bonds can be traded before they mature, causing their market value to fluctuate, the current yield (often referred to simply as the yield) will usually diverge from the bond's coupon or nominal yield. For example, at issue, the $1,000 bond described above yields 7%; that is, its current and nominal yields are both 7%. If the bond later trades for $900, the current yield rises to 7.8% ($70 ÷ $900). The coupon rate, however, does not change, since it is a function of the annual payments and the face value, both of which are constant.

Coupon rate or nominal yield = annual payments ÷ face value of the bond

Current yield = annual payments ÷ market value of the bond

The current yield is used to calculate other metrics, such as the yield to maturity and the yield to worst.

Coupon Bonds

The term "coupon" originally refers to actual detachable coupons affixed to bond certificates. Bonds with coupons, known as coupon bonds or bearer bonds, are not registered, meaning that possession of them constitutes ownership. To collect an interest payment, the investor has to present the physical coupon.

Bearer bonds were once common. While they still exist, they have fallen out of favor for two reasons. First, an investor whose bond is lost, stolen or damaged has functionally no recourse or hope of regaining his investment. Second, the anonymity of bearer bonds has proven attractive to money launderers. A 1982 U.S. law significantly curtailed the use of bearer bonds, and all Treasury-issued bearer bonds are now past maturity. 

Today, the vast majority of investors and issuers alike prefer to keep electronic records on bond ownership. Even so, the term "coupon" has survived to describe a bond's nominal yield.

RELATED TERMS
  1. Coupon Rate

    The yield paid by a fixed income security. A fixed income security's ...
  2. Nominal Yield

    The coupon rate on a bond. The nominal yield is the interest ...
  3. Current Coupon Bond

    A bond with a coupon rate that is within 0.5\% of the current ...
  4. Effective Yield

    The yield of a bond, assuming that you reinvest the coupon (interest ...
  5. Coupon Bond

    A debt obligation with coupons attached that represent semiannual ...
  6. Required Yield

    The return a bond must offer in order to be a worthwhile investment. ...
Related Articles
  1. Bonds & Fixed Income

    Comparing Yield To Maturity And The Coupon Rate

    Investors base investing decisions and strategies on yield to maturity more so than coupon rates.
  2. Investing Basics

    Explaining the Coupon Rate

    Coupon rate is the stated interest rate on a fixed income security.
  3. Bonds & Fixed Income

    Advanced Bond Concepts: Bond Pricing

    It is important for prospective bond buyers to know how to determine the price of a bond because it will indicate the yield received should the bond be purchased. In this section, we will run ...
  4. Investing Basics

    What is a "Coupon"?

    In the financial world, “coupon” represents the interest rate on a bond.
  5. Bonds & Fixed Income

    Advanced Bond Concepts: Yield and Bond Price

    In the last section of this tutorial, we touched on the concept of required yield. In this section we'll explain what this means and take a closer look into how various yields are calculated. ...
  6. Professionals

    Bond Yields

    FINRA/NASAA Series 65: Section 8 Bond Yields. In this section yield to maturity, current yield, yield to call and real interest rate.
  7. Professionals

    Basic Coupon Structures

    CFA Level 1 - Basic Coupon Structures. Learn the various coupon structures of bonds. Provides an example of a floating rate bond and discusses how it relates to caps and floors.
  8. Investing

    Understanding the Different Types of Bond Yields

    Any investor, private or institutional, should be aware of the diverse types and calculations of bond yields before an actual investment.
  9. Bonds & Fixed Income

    Using Excel PV Function to compute Bonds PV

    To determine the value of a bond today - for a fixed principal (par value) to be repaid in the future at any predetermined time - we can use an Excel spreadsheet.
  10. Bonds & Fixed Income

    Simple Math for Fixed-Coupon Corporate Bonds

    A guide to help to understand the simple math behind fixed-coupon corporate bonds.
RELATED FAQS
  1. How does a bond's coupon interest rate affect its price?

    Find out why the difference between the coupon interest rate on a bond and prevailing market interest rates has a large impact ... Read Answer >>
  2. What is the difference between yield to maturity and the coupon rate?

    Read about some of the basic differences between a debt security's coupon rate and its yield to maturity, and learn which ... Read Answer >>
  3. What is the most common solvency ratios used in fundamental analysis?

    Learn about the difference between a bond's coupon rate and its yield rate, how the coupon rate influences market price and ... Read Answer >>
  4. How does the money from the interest on my bond get to me?

    When you buy a regular coupon bond, you are entitled to a coupon, which is typically paid at regular intervals, and the face ... Read Answer >>
  5. How does a bond's coupon rate affect its price?

    Find out how a bond's coupon rate influences its price, including the role of government-dictated interest rates and the ... Read Answer >>
  6. How do debit spreads impact the trading of options?

    Find out what it means when a bond has a coupon rate of zero and how a bond's coupon rate and par value affect its selling ... Read Answer >>
Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center