Next video:
Loading the player...

Coupon rate is the stated interest rate on a fixed income security.  It’s the yield as of the issue date.  The yield is calculated by summing the coupons for a given year, and then dividing that sum by the security’s face value.

For example, if a $1,000 bond issued on January 1 has coupons that pay $75 on June 30 and $75 December 31, then the bond’s yield is:

($75 + $75)/$1,000 = 15%

It’s important to remember that the 15% yield on this bond is the yield as of its issue date.  As interest rates rise and fall, the effective yield changes as the bond trades in the secondary markets.  The effective yield changes because the bond will be traded for more or less than its stated face amount of $1,000.  The calculation of exactly how much an investor will pay for the bond is a highly sophisticated yield-to-maturity calculation. 

In the most basic terms, if rates fall below 15%, investors will be willing to pay more than $1,000 for this bond because they can’t purchase new bonds with such a high coupon rate.  If rates rise, investors will only be willing to pay less than $1,000 for this bond because they can buy new bonds with a higher coupon rate.

Related Articles
  1. Investing

    How Does A Bond’s Coupon Interest Rate Affect Its Price?

    All bonds come with a coupon interest rate, which is the fixed annual interest a bond pays.
  2. Investing

    Comparing Yield To Maturity And The Coupon Rate

    Investors base investing decisions and strategies on yield to maturity more so than coupon rates.
  3. Personal Finance

    ‘Retired’ Too Soon? How to Reenter the Workforce After 50

    Here's what you need to know to survive financially and reenter the workforce when you're over 50 and a layoff has forced you to "retire" too soon.
  4. Investing

    Understanding Bond Prices and Yields

    Understanding this relationship can help an investor in any market.
  5. Financial Advisor

    Simple Math for Fixed-Coupon Corporate Bonds

    A guide to help to understand the simple math behind fixed-coupon corporate bonds.
  6. Investing

    What is a Premium Bond?

    A premium bond is one that trades above its face or nominal amount.
  7. 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.
  8. Investing

    If I Buy A $1,000 10-Year Bond With A 10% Coupon, Will I Receive $100 Each Year?

    Investors can count on a fixed-income security paying them a certain amount of cash as long as the security is held until maturity and the issuer doesn’t default.
Hot Definitions
  1. Dividend Yield

    A financial ratio that shows how much a company pays out in dividends each year relative to its share price.
  2. Fixed-Income Security

    An investment that provides a return in the form of fixed periodic payments and the eventual return of principal at maturity. ...
  3. Free Cash Flow - FCF

    A measure of financial performance calculated as operating cash flow minus capital expenditures. Free cash flow (FCF) represents ...
  4. Leverage Ratio

    Any ratio used to calculate the financial leverage of a company to get an idea of the company's methods of financing or to ...
  5. Two And Twenty

    A type of compensation structure that hedge fund managers typically employ in which part of compensation is performance based. ...
  6. Market Capitalization

    The total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying ...
Trading Center