Coupon (bond)

A coupon payment on a bond is a periodic interest payment that the bondholder receives during the time between when the bond is issued and when it matures.

Coupons are normally described in terms of the coupon rate, which is calculated by adding the total amount of coupons paid per year and dividing by the bond's face value. For example, if a bond has a face value of $1,000 and a coupon rate of 5%, then it pays total coupons of $50 per year. For the typical bond, this will consist of semi-annual payments of $25 each.

The coupon rate is the yield that the bond pays on its issue date; however, this yield can change as the value of the bond changes and thus giving the bond's yield to maturity. Bonds having higher coupon rates are therefore more desirable for investors than those having lower coupon rates.

Overview

The origin of the term "coupon" is that bonds were historically issued in the form of bearer certificates. Physical possession of the certificate was proof of ownership. Several coupons, one for each scheduled interest payment over the life of the bond, were printed on the certificate. At the date the coupon was due, the owner would detach the coupon and present it for payment (an act called "clipping the coupon").