What is Coupon or Coupon Rate of Bonds?

Howdy Wall St. Willy! Sometime ago, I heard about a coupon that’s 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.

But, how is the coupon rate even 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 don’t like zero coupon bonds. But we’ll talk about it more some other day.

Well, 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!

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