Introduction to Coupon Rate for Kids and Teens
This video explains the concept of coupon rate in a simple, concise way for kids and beginners. It could be used by kids & teens to learn about coupon, or used as a money & personal finance resource by parents and teachers as part of a Financial Literacy course or K-12 curriculum.
Suitable for students from grade levels:
- Kindergarten
- Elementary School
- Middle School
- High School
The topics covered are:
- What is coupon rate of a bond
- Different types of coupon rates
- Factors affecting the coupon rate
- A detailed example
Old Version
- What is coupon or coupon rate
- How is coupon rate decided
- Stocks and coupon
- Do all bonds have a coupon
- When is coupon paid
- Is coupon rate fixed
What is coupon rate of a bond?
A bondโs coupon rate is the annual interest paid to the bondholder by the issuer, expressed as a percentage of the bond’s face value.
Face value, or par value, is the price at which the bond is issued and is also what the bond owner receives at maturity.
Coupon rate is determined when the bond is first issued, and usually remains constant throughout the life of the bond. It is paid semi-annually or annually.
Are there different types of coupon rates?
Yes. The most common is a fixed rate coupon that remains constant throughout the life of the bond.
For example, if the face value of the bond is $1,000 and the coupon rate is 5%, the bondholder receives $50 each year until maturity.
A floating coupon rate fluctuates based on a predetermined criteria and is generally tied to the prevailing interest rates.
There are also zero coupon bonds that pay no interest but are offered at a deep discount to their face value. They are redeemed at face value at maturity, which results in a profit for investors.
What factors affect the coupon rate?
The coupon rate of a newly issued bond is tied to the prevailing market rates. But once the bond is issued and is trading in the secondary market, the coupon rate doesnโt change.
Even if the interest rates in the economy go up or down, it has no effect on the coupon rate or the coupon payments of existing bonds.
What will change according to the prevailing interest rates is the coupon rates of new bonds that are issued.
Can you give me an example?
Letโs say you own a bond with a face value of $1,000 and a coupon rate of 5%. This gives you $50 every year until maturity, no matter what price the bond trades for.
Even if you bought the bond in the secondary market, you will still get the same $50 coupon per year.
Whether your purchase price was $900 or $1,200, the coupon is always paid on face value which remains constant throughout the life of the bond.
What is Coupon or Coupon Rate: Old Version
Howdy Wall St. Willy! Sometime ago…
I heard about a coupon thatโs related to investing, but is it like a store coupon?
What is it anyway?
A coupon is the amount of interest a bond issuer pays periodically to the bond holder.
Coupon or coupon rate is expressed as a percentage of the face value or the nominal value of the bond, which is the dollar amount the original buyer paid for it.
How is the coupon rate decided?
Coupon rate is decided by the bond issuer when they issue the bond depending on the interest rates prevailing in the market at that time.
Do stocks also have coupon?
No. Stocks can also make payments to stockholders which are called dividends. But they are neither a fixed amount nor are they guaranteed like coupons.
Do ALL bonds pay coupon?
Most bonds do pay coupon but there are some specific kinds of bonds that donโt like zero coupon bonds. But weโll talk about it more some other day.
How often is coupon paid?
Most US bonds pay interest or coupon every 6 months or semi-annually.
Is coupon a fixed amount or does it keep changing?
The dollar amount and the rate of coupon is decided at the time of issuing the bond and stays the same for the life of the bond.
If the coupon rate is 5%, is that the return I receive from my bond investment?
Your actual return depends on the price at which you buy the bond and it is called yield but that is a topic for another time.
Thank you very much for telling me about coupon, Wall St. Willy.
You are welcome, Sooper Cooper. Remember, Finance is Your Friend!