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In the financial world, “coupon” represents the interest rate on a bond.  Typically the coupon is paid semi-annually.  Coupon is short for “coupon rate” or “coupon percentage rate.” 

The use of the word coupon to describe the interest rate on a bond is derived from the fact that bonds used to be issued in physical, paper, form.  Attached to the bonds were coupons that had to be removed from the bond and redeemed with the issuer in order to receive the interest payment. Bond owners literally had to “clip” the coupon off the bond. Coupon is sometimes used in reference to retired investors who have most of their wealth in fixed income securities and spend their retirement years clipping coupons.

Now that bonds are recorded and traded electronically, the need for a paper coupon has been eliminated.  The coupon has become an automatic payment to the bondholder of record in the issuer’s electronic database.

To determine the interest rate from a bond’s coupons, add all of the coupon payments for a given year, and then divide that sum by the bond’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%

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