Coupon

A coupon is the fixed interest a bond pays on a set schedule, established when the bond is issued. It is quoted as an annual percentage of the bond's face value and commonly paid in one or two instalments a year. Whatever the bond's market price later does, the money amount of a fixed coupon does not change. The name is a relic: bonds were once printed with dated paper slips that holders clipped off and exchanged for each payment.

A worked example

Suppose a hypothetical bond has a face value of 1,000 and a coupon of 5 per cent, so it pays 50 a year — 25 every six months if paid half-yearly. If the bond's market price falls to 800, the payment is still 50, but 50 on a price of 800 is a running yield of 6.25 per cent. At a price of 1,250, the same 50 would be a running yield of 4 per cent.

The coupon is not the return. What a holder earns depends on the price paid, the amount received at redemption and what the payments earn when reinvested — and the coupon says nothing about whether the issuer can keep paying it.