Coupon Rate

The coupon rate is the annual interest rate paid on a bond, expressed as a percentage of the bond’s face value. It determines the size of the periodic coupon payments that the bondholder will receive. The coupon rate is fixed at the time of issuance and remains unchanged throughout the bond’s life unless the bond is a floating-rate bond.

Example

A bond with a face value of $1,000 and a 6% coupon rate will pay the bondholder $60 annually in coupon payments (6% of $1,000).

Key points

• The coupon rate is the annual interest paid on a bond, based on its face value.

• It determines the size of the bond’s coupon payments.

• The coupon rate is fixed unless the bond has a floating rate, where it changes periodically.

Quick Answers to Curious Questions

How does the coupon rate affect a bondholder’s income?

The coupon rate determines the bondholder’s periodic interest payments, providing a predictable income stream.

Can the coupon rate change over time?

The coupon rate for a fixed-rate bond remains the same throughout its life, but for floating-rate bonds, it adjusts based on interest rate benchmarks.