Coupon Payment

A coupon payment is the periodic interest a bond issuer pays to whoever holds the bond. When a government or company borrows money by issuing a bond, it promises to pay the amount back at a set future date (called maturity), and in the meantime it pays the lender interest on a schedule, usually every six months or once a year. That scheduled interest payment is the coupon.

The word comes from paper bond certificates issued long before electronic trading existed. Those certificates had small detachable paper coupons printed along the edge, one for each interest payment date. The bondholder would physically tear one off and take it to a bank or the issuer to collect the cash. Nobody clips paper coupons anymore, but the name stuck.

The size of the coupon is usually expressed as a percentage of the bond's face value (the amount paid back at maturity, also called par value), not as a percentage of whatever price you paid for the bond. So a bond with a $1,000 face value and a 5% coupon pays $50 a year in interest, split into two $25 payments if it pays semiannually, regardless of whether you bought that bond for $1,000, $950, or $1,080 in the market.

The nuance that trips people up is the difference between coupon rate and yield. The coupon rate is fixed at issuance and tells you the dollar amount of interest based on face value. Yield reflects what you actually earn based on the price you paid, so if you buy a bond below face value, your effective yield is higher than the coupon rate, and if you buy above face value, your yield is lower. A bond that pays no coupon at all, called a zero-coupon bond, is sold at a discount to face value and the entire return comes from that price difference rather than periodic payments.