What is a bond coupon?
In one line: A coupon is the interest a bond pays, set as a yearly rate on its face value, and usually paid in two halves each year.
A simple example
When a Bond is issued, it comes with a coupon rate. That rate stays fixed for the life of the bond.
Say a bond has a $1,000 face value and a 5% coupon.
- Yearly interest: 5% × $1,000 = $50.
- Paid twice a year: $25 every six months.
The name comes from the old days. Paper bonds had small tear-off coupons. Holders clipped one and handed it in to collect each payment.
Coupon vs yield
The coupon is fixed. The Bond yield isn't. Yield is what you earn based on the price you actually pay.
Say rates rise and that same bond now sells for $900. It still pays $50 a year.
- Coupon rate: 5% (always $50 on $1,000).
- Current yield: $50 ÷ $900 = about 5.6%.
If the bond sells for $1,100, the current yield is $50 ÷ $1,100 = about 4.5%.
So coupon tells you the payment. Yield tells you the return at today's price.
Why it matters
Low-coupon bonds swing more when rates move, because more of their value sits in the final repayment far in the future. That's part of what Duration measures.
A common mistake
Thinking a high coupon always means a good deal. A bond paying a high coupon often comes from a riskier borrower, or it trades above face value so you pay extra for it. Look at the yield, the price and who's borrowing.
Some bonds pay no coupon at all. They're sold below face value instead, like a Treasury bill. These are called zero-coupon bonds.
Questions
Does a bond's coupon ever change?
For a regular fixed-rate bond, no. Some "floating-rate" bonds have coupons that reset with a reference rate.
What's the difference between coupon and interest rate?
The coupon is the specific rate one bond pays. "Interest rates" usually means the rates across the market today, which move the bond's price.
How often are coupons paid?
US Treasury notes and bonds and many company bonds pay every six months. Some bonds pay yearly or quarterly.
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