Coupon Rate
The coupon rate is the annual interest a bond pays as a percentage of its face value. A $1,000 bond with a 4% coupon pays $40 a year, whatever its market price.
The coupon is the interest a bond promises to pay. It is fixed when the bond is issued and does not change when the bond’s market price moves. That is exactly why coupon rate and yield are different numbers: the coupon tells you what the bond pays, the yield tells you what you earn at the price you pay. This entry explains coupons, how they are paid, and how they relate to yields and prices.
- Category
- Bonds and Interest Rates
- Reading time
- 4 min
- Also called
- Coupon, Nominal yield, Bond coupon
- Updated
The coupon rate in plain words
The coupon is the interest rate on a bond — the amount of interest due and when it will be paid.1 A 5% coupon on a $1,000 bond means $50 a year.
In the US, coupons are often quoted as an annual rate but paid in two halves a year; the coupon rate is expressed as a semi-annual rate.2 So a 5% bond typically pays $25 every six months.
How coupons work, step by step
Set at issue
The issuer fixes the coupon rate when the bond is sold.
Paid on face value
Annual coupon = coupon rate × face value.
Paid on a schedule
Often every six months; some bonds pay yearly or quarterly.
Unchanged by price
If the bond’s price moves, the coupon stays the same.
Yield changes instead
Current yield and yield to maturity move with price. See Current Yield.
Special cases
Floating-rate bonds reset their coupon; zero-coupon bonds pay none. See Zero-Coupon Bond.
Worked examples
Example 1 — Coupon payments
PaymentsA $1,000 bond with a 4.5% coupon, paid twice a year.
| Annual coupon | 4.5% × $1,000 = $45 |
| Each payment | $22.50 |
The coupon is a fixed cash amount based on face value.
Example 2 — Price moves, coupon does not
Yield vs. couponThe same bond’s price falls to $900 after market rates rise.
| Coupon | Still $45 a year |
| Current yield | $45 ÷ $900 = 5.0% |
When rates rise, fixed-rate bond prices fall and yields rise; the coupon stays the same.3
Example 3 — Choosing between coupons
Shape of returnTwo bonds have the same yield to maturity, but one has a 2% coupon (priced well below face value) and one a 6% coupon (priced above face value).
| Low coupon | Less income now, more gain at maturity |
| High coupon | More income now, a loss to face value at maturity |
The same total return can arrive in different shapes. See Yield to Maturity.
Coupon rate vs. yields
| Aspect | Based on | Changes with price? |
|---|---|---|
| Coupon rate | Face value | No |
| Current yield | Today’s price | Yes |
| Yield to maturity | Price, coupon and time | Yes |
| Real yield | Yield minus inflation | Yes. See Real Yield |
Why the coupon matters
Income planning
Knowing the cash a bond pays and when.
Rate sensitivity
Lower-coupon bonds are generally more sensitive to rate changes. See Duration.
Comparing bonds
Together with price, it determines yield.
Reinvestment
Coupons received must be reinvested at future rates.
Advantages and disadvantages
Advantages
- Fixed, predictable income for fixed-rate bonds.
- Easy to calculate.
- Clear payment schedule.
Disadvantages
- Not the same as the return you earn.
- Fixed coupons lose real value with inflation. See Inflation.
- Payment frequency conventions vary.
Going deeper
Read as far as you need. Each level builds on the one before it.
Why it is called a coupon
Beginner
Paper bonds once had detachable coupons that holders clipped and presented to collect each interest payment.
Accrued interest
Intermediate
When a bond is sold between payment dates, the buyer usually pays the seller the interest accrued since the last coupon.
Coupon and duration
Advanced
Higher coupons return more cash earlier, which lowers duration — the bond’s sensitivity to rate changes. See Duration.
Common mistakes
Confusing coupon and yield
The yield depends on the price you pay.
Expecting coupons to rise with rates
Fixed coupons do not change.
Ignoring payment frequency
Semi-annual payments are half the annual coupon.
Chasing high coupons
Check price and credit quality too.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- The coupon rate is fixed interest as a percentage of face value.
- It does not change when the bond’s price moves.
- Yields change with price; the coupon does not.
- Coupons are often paid twice a year.
- Fixed coupons lose real value with inflation.
Frequently asked questions
Is the coupon rate the same as the interest rate?
Why is a bond’s yield different from its coupon?
Do all bonds pay coupons?
Further learning
- Current Yield
Coupon relative to price.
- Yield to Maturity
The full return measure.
- Zero-Coupon Bond
Bonds with no coupon.
- Treasury Bills, Notes and Bonds
Government bonds and their coupons.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- Investor.gov (SEC). Coupon (glossary) (opens in a new tab) Checked .
- Investor.gov (SEC). Coupon Rate (glossary) (opens in a new tab) Checked .
- Investor.gov (SEC). Investor Bulletin: Fixed Income Investments — When Interest Rates Go Up, Prices of Fixed-Rate Bonds Fall (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.