Glossary
Coupon
The annual interest a bond pays, stated as a percentage of its face value; a 5% coupon on a $1,000 bond pays $50 a year.
A bond's coupon is the interest it promises to pay, expressed as a fixed annual percentage of its Face value (par value). The name comes from the paper coupons that once hung off bearer bonds and were clipped and presented for payment. Today the payments arrive electronically, but the term stuck.
How coupon payments work
Most US Treasury notes, bonds and corporate bonds pay their coupon in two equal halves each year. The rate is set at issue and, for a standard fixed-rate bond, never changes.
Coupon rate is not the same as yield
The coupon is fixed in dollars; the Yield an investor earns depends on the price paid. When a bond trades above face value (a premium), its yield is below its coupon. When it trades below face value (a discount), its yield is above the coupon. That inverse link between price and yield is the heart of Interest-rate risk.
Variations
- Zero-coupon bonds pay no coupon at all; they are sold at a discount and repaid at face value. See Zero-coupon bond.
- Floating-rate notes reset their coupon periodically to a benchmark such as SOFR plus a spread.
- Inflation-linked bonds such as TIPS pay a fixed rate on a principal that adjusts with CPI, so the dollar payment changes.
A high coupon is not a free lunch: issuers that pay well above Treasury rates usually do so because investors see more Credit Risk.