Coupon rate

Definition

The coupon rate is the annual interest rate paid by the bond issuer to the bondholder, expressed as a percentage of the bond's face value. It determines the periodic interest payments made to investors throughout the life of the bond.

5 Must Know Facts For Your Next Test

1. The coupon rate is fixed at issuance and does not change over the life of the bond.
2. It is different from the yield, which can fluctuate based on market conditions and price changes.
3. Bonds with higher coupon rates generally offer higher periodic interest payments to investors.
4. The coupon rate is used to calculate the dollar amount of interest paid annually by multiplying it by the bond's face value.
5. Coupon payments are typically made semi-annually, but can also be made annually or quarterly.

Review Questions

• What is the relationship between a bond's coupon rate and its periodic interest payments?
• How does a bond's yield differ from its coupon rate?
• In what way does a changing market interest rate affect a fixed coupon rate?

Related terms

Face Value: The nominal value or principal amount of a bond that is repaid at maturity.

Yield to Maturity (YTM): The total return anticipated on a bond if it is held until it matures.

Current Yield: The annual income from a bond divided by its current market price.