Coupon

The coupon is the interest rate the issuer agrees to pay on a bond's face value, fixed when the bond is issued. A 5% coupon on a bond with a face value of 1,000 means 50 a year, whatever the bond later trades at. Many bonds pay annually or semi-annually, splitting the annual amount into instalments. The name comes from paper bonds that carried detachable coupons, which holders clipped and presented to collect each payment. Some bonds pay a floating coupon that resets with a reference rate, and zero-coupon bonds pay no interest at all but are sold below face value.

The coupon is not the same as the return you earn. Because a bond's market price moves, a buyer who pays less than face value earns more than the coupon rate, and a buyer who pays more earns less. That is why investors compare bonds by yield rather than coupon. The coupon still matters: it determines the cash income you receive and how sensitive the bond is to interest rate changes, since bonds with low coupons return more of their value at the end and so tend to have a longer duration.