What Is a Bond's Coupon Rate?

Introduction

When you buy a bond, you are lending money to a company or government. In return, they pay you interest. The coupon rate tells you how much interest that bond will pay each year.

What Is a Coupon Rate?

The coupon rate is the annual interest rate a bond pays, based on its face value. If a bond has a face value of $1,000 and a coupon rate of 5%, it pays $50 per year. Many bonds pay this interest in two payments of $25 every six months.

Where the Name Comes From

Long ago, bonds were printed on paper with small coupons attached. Bondholders would clip off a coupon and present it to collect each interest payment. Today bonds are electronic, but the name stuck.

Coupon Rate vs. Yield

The coupon rate stays fixed for most bonds, but a bond's price can change in the market. A bond's yield shows the actual return based on the price you pay. If you buy a bond below face value, your yield will be higher than the coupon rate. If you pay more than face value, your yield will be lower.

Conclusion

The coupon rate is one of the most important features of any bond. Understanding it is a great first step toward investing in fixed income!