COUPON

Summary

A coupon is the fixed annual interest payment that a bond pays to its holder, expressed as a percentage of the bond's face value (par value). For example, if you own a $1,000 bond with a 5% coupon rate, you'll receive $50 in interest payments each year (usually split into two $25 payments every six months). The term 'coupon' comes from the historical practice where bonds had physical coupons attached that investors would clip and present to receive their interest payments. The coupon rate is set when the bond is issued and remains fixed throughout the bond's life, regardless of changes in market interest rates.

Usage Context

Understanding coupons is essential when learning about bond valuation, fixed-income investments, calculating bond returns, comparing different bonds, and understanding how interest rate changes affect bond prices.

Common Confusions

• Confusing coupon rate with current yield or yield to maturity
• Thinking the coupon rate changes when bond prices fluctuate
• Assuming coupon payments are made annually when many are semi-annual
• Believing that higher coupon rates always mean better investments