coupon
The annual interest rate paid on a bond, expressed as a percentage of the face value.
Example
“The bond had a 5% coupon, paying $50 per year on a $1,000 face value.”
Memory Tip
Old bonds had physical COUPONS you'd clip to get your interest payment. The coupon rate is that interest.
Why It Matters
Understanding coupon rates helps you compare bonds and predict your annual income from bond investments. This knowledge directly affects your investment returns and helps you make informed decisions about whether a bond fits your financial goals and risk tolerance.
Common Misconception
Many people assume the coupon rate is the same as the bond yield or return they will actually earn. In reality, the coupon rate remains fixed, but your actual yield changes based on the price you pay for the bond in the secondary market.
In Practice
If you buy a bond with a face value of 1000 dollars and a coupon rate of 5 percent, you will receive 50 dollars in annual interest payments regardless of market conditions. However, if you later sell that bond for 900 dollars, the new owner will still receive 50 dollars per year but will have a higher yield of approximately 5.56 percent on their 900 dollar investment.
Etymology
From French 'coupon' meaning 'piece cut off' — bondholders once clipped physical coupons to collect interest.
Common Misspellings
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