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

  1. Set at issue

    The issuer fixes the coupon rate when the bond is sold.

  2. Paid on face value

    Annual coupon = coupon rate × face value.

  3. Paid on a schedule

    Often every six months; some bonds pay yearly or quarterly.

  4. Unchanged by price

    If the bond’s price moves, the coupon stays the same.

  5. Yield changes instead

    Current yield and yield to maturity move with price. See Current Yield.

  6. Special cases

    Floating-rate bonds reset their coupon; zero-coupon bonds pay none. See Zero-Coupon Bond.

Worked examples

Example 1 — Coupon payments

Payments

A $1,000 bond with a 4.5% coupon, paid twice a year.

Example 1 — Coupon payments — calculation
Annual coupon4.5% × $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. coupon

The same bond’s price falls to $900 after market rates rise.

Example 2 — Price moves, coupon does not — calculation
CouponStill $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 return

Two 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).

Example 3 — Choosing between coupons — calculation
Low couponLess income now, more gain at maturity
High couponMore 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

AspectBased onChanges with price?
Coupon rateFace valueNo
Current yieldToday’s priceYes
Yield to maturityPrice, coupon and timeYes
Real yieldYield minus inflationYes. 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

  1. Confusing coupon and yield

    The yield depends on the price you pay.

  2. Expecting coupons to rise with rates

    Fixed coupons do not change.

  3. Ignoring payment frequency

    Semi-annual payments are half the annual coupon.

  4. Chasing high coupons

    Check price and credit quality too.

Check your understanding

Test yourself before moving on. Each answer comes with an explanation.

Q1A $1,000 bond has a 6% coupon paid semi-annually. How much is each payment?
Q2Market rates rise and the bond’s price falls. What happens to its coupon?

Key points to remember

  1. The coupon rate is fixed interest as a percentage of face value.
  2. It does not change when the bond’s price moves.
  3. Yields change with price; the coupon does not.
  4. Coupons are often paid twice a year.
  5. Fixed coupons lose real value with inflation.

Frequently asked questions

Is the coupon rate the same as the interest rate?

It is the bond’s own fixed interest rate. Market interest rates move separately and change the bond’s price.

Why is a bond’s yield different from its coupon?

Because you usually buy the bond at a price above or below face value.

Do all bonds pay coupons?

No. Zero-coupon bonds pay none, and floating-rate bonds have coupons that reset.

Further learning

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.

  1. Investor.gov (SEC). Coupon (glossary) (opens in a new tab) Checked .
  2. Investor.gov (SEC). Coupon Rate (glossary) (opens in a new tab) Checked .
  3. 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.