Coupon
What is Coupon?
A coupon is the contractual interest payment on a bond, while the coupon rate expresses that payment as a percentage of face value.
How coupons work
A fixed-rate bond normally pays the same stated amount on scheduled dates, often annually or semiannually. A floating-rate coupon resets using a reference rate plus or minus a spread. Some bonds defer, capitalize, or make contingent payments. The coupon is defined by the contract and does not change merely because the bond's market price or yield changes.
Coupon versus yield
Coupon rate uses face value as its denominator. Current yield uses market price, and yield to maturity also incorporates the price difference between purchase and principal repayment plus timing. A premium bond can have a coupon rate above its yield to maturity, while a discount bond can have a coupon below its yield to maturity.
Example
A $1,000 bond with a 5% annual coupon pays $50 per year. If it trades at $900, its current yield is about 5.56%, but yield to maturity also reflects the expected $100 gain if repaid at $1,000. If it trades at $1,100, current yield is about 4.55% and pull-to-par works in the opposite direction.
How to interpret it
A high coupon does not necessarily mean a high expected return or low risk. The bond may trade at a premium, be callable, have weak credit, or be denominated in a risky currency. Compare payment frequency and day-count convention. For inflation-linked or floating-rate bonds, future coupon amounts are not known in the same way as fixed coupons.
Risks and limitations
Coupon income can be interrupted by default, restructuring, deferral, or contractual loss absorption. Reinvestment risk means coupons received before maturity may earn less than assumed. Tax treatment can differ between coupon income and capital gain. Accrued interest also affects the cash paid on settlement, so quoted clean price is not always the invoice amount.
Practical checklist
Confirm face value, rate type, reference index, spread, reset schedule, payment frequency, day count, business-day rule, and any caps or floors. Build the contractual cash-flow schedule and distinguish clean price, accrued interest, and dirty price. Compare coupon, current yield, yield to maturity, and yield to call without using the terms interchangeably.
Also known as: coupon payment, coupon rate
Sources and further reading
- Bonds: Frequently Asked Questions, Investor.gov, U.S. Securities and Exchange Commission