Coupon Rate

The coupon rate is the annual interest rate paid by a bond’s issuer on the bond’s face value (par value). It is called a ‘coupon’ because historically, bondholders would receive actual paper coupons that they would clip and redeem for interest payments. The coupon rate is fixed when the bond is issued and remains constant throughout the bond’s life. For example, a $1,000 bond with a 6% coupon rate will pay $60 per year, typically in two semi-annual payments of $30 each. The coupon rate differs from the bond’s yield, which fluctuates based on the bond’s market price. If interest rates rise after a bond is issued, the bond’s price typically falls, causing its yield to rise above the coupon rate.