Coupon

The periodic interest a bond pays, quoted as a percentage of par value rather than of the price. It is fixed by the contract at issue and does not change with the market.

Example

A 4% coupon on a 1,000 par value is 40 a year, whether the bond trades at 915.75 or at 1,094.27.

Important

The coupon tells you what the issuer owes, never what you earn. Your return depends on what you paid, which is why coupon rate, current yield and yield to maturity are three different numbers.

Related terms

• Par value — The sum the issuer repays at maturity, per unit of the bond. Also called face value or principal. It is the base on which the coupon percentage is calculated.
• Current yield — The annual coupon divided by the current price. It measures the income received against what the bond costs today, and nothing else.
• Yield to maturity — The single discount rate at which the present value of a bond's remaining cash flows equals its current price. It has no closed-form solution for a multi-period bond and is found numerically.
• Reinvestment — Using an investment's income or gains to buy more of the same investment, rather than taking them as cash.

Lessons that explain it

• A bond is a loan with a contract: what you are owed, and by whom — Four facts define a bond - issuer, par, coupon, maturity - and all four are contractual. You are a creditor, ranking ahead of every shareholder. (10 min)
• The schedule, and the part of the return nobody prints on it — A bond's cash flows are written down in advance. What those cash flows finally compound to is not, and that gap is where the quoted yield quietly makes an assumption on your behalf. (11 min)

All 578 terms in the Investing glossary