Coupon Rate
A coupon rate is the fixed annual interest rate that a bond issuer promises to pay a bondholder, expressed as a percentage of the bond's face value (also called par value — the amount the bond will be worth when it matures and is repaid in full).
It works like this: when a bond is issued, the issuer sets a coupon rate that stays the same for the life of the bond, no matter what happens to interest rates or the bond's market price afterward. That percentage is applied to the face value, not to whatever price you actually paid for the bond, to determine the dollar amount of interest paid each year. Payments are usually split into two equal installments six months apart, though some bonds pay annually, quarterly, or not at all.
The nuance that trips people up is the difference between coupon rate and yield. The coupon rate is fixed and tied to face value, but a bond's price moves up and down in the market after it's issued. If you buy a bond below face value, the fixed coupon payment becomes a higher percentage return on what you actually paid — that real-world return is called the yield, and it changes constantly even though the coupon rate never does. So a bond with a 5% coupon rate is not always "a 5% investment"; it depends on the price you pay.
The term "coupon" is a holdover from when bonds were paper certificates with physical, detachable coupons that holders would clip and redeem for each interest payment. No paper is involved anymore, but the name stuck.
Day traders rarely hold bonds to collect coupons directly, but coupon rates on government debt (especially short-term Treasuries) drive the broader interest-rate environment that moves stocks, currencies, and volatility — and bond yield moves are a common catalyst that traders watch intraday.
A company issues a $1,000 face-value bond with a 5% coupon rate, paid semi-annually. You receive $25 every six months ($50 total per year) for as long as you hold the bond, regardless of whether the bond's market price later rises to $1,050 or falls to $900. The coupon rate stays 5% either way; only the yield you'd earn by buying at that new price changes.
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