Coupon Rate

The coupon rate is the annual interest a bond pays, stated as a percentage of face value. A $1,000 bond with a 5% coupon pays $50 per year (usually $25 every six months). The name comes from the old days when bonds had physical coupons that investors clipped and redeemed for interest payments.

Important distinction: coupon rate is fixed at issuance and never changes. But the bond's price fluctuates in the market. If interest rates rise to 7%, your 5% coupon bond becomes less attractive — its price drops below $1,000. If rates fall to 3%, your 5% coupon is a bargain — the price rises above $1,000. The current yield (coupon ÷ market price) reflects the actual return.

Bond pricing rule: when market rates > coupon rate, the bond trades at a discount (below face value). When market rates < coupon rate, it trades at a premium (above face value). At par means the market rate equals the coupon rate. Understanding this inverse relationship between rates and prices is fundamental to bond investing.