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Trading and Investment Terms

Coupon

A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from the issue date until maturity

 

For example 

A $1,000 bond with a coupon of 7% pays $70 a year. Typically these interest payments will be semiannual, meaning the investor will receive $35 twice a year.

 

Because bonds can be traded before they mature, causing their market value to fluctuate, the current yield will usually diverge from the bond's coupon or nominal yield. 

 

For example, at issue, the $1,000 bond described above yields 7%; that is, its current and nominal yields are both 7%. 

If the bond later trades for $900, the current yield rises to 7.8% ($70 ÷ $900). 

The coupon rate, however, does not change, since it is a function of the annual payments and the face value, both of which are constant.

 

Coupon rate or nominal yield = annual payments ÷ face value of the bond

 

Current yield = annual payments ÷ market value of the bond

 

The current yield is used to calculate other metrics, such as the yield to maturity and the yield to worst.

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