Coupon

Term of the Day - 4 March 2024

Today’s Term is “Coupon”.

In the realm of finance, a "coupon" refers to a periodic interest payment made by the issuer of a fixed-income security, such as bonds or debentures, to its bondholders. This payment is typically expressed as a percentage of the bond's face value and is distributed at regular intervals, often semi-annually or annually.

The term "coupon" originated from physical bond certificates that had detachable interest payment coupons, which bondholders could redeem for their interest earnings.

The coupon rate is predetermined and established at the time of the bond issuance. It represents the annual interest payment as a percentage of the bond's face value. For example, a bond with a $1,000 face value and a 5% coupon rate would yield annual interest payments of $50. Investors consider the coupon rate when assessing the attractiveness of a bond, as it influences the overall yield and income potential.

In a broader sense, the concept of a coupon extends to other fixed-income securities, like Treasury bonds or corporate bonds. Coupons play a crucial role in determining the total return on investment for bondholders and are integral to understanding the risk-return profile of fixed-income securities in the financial market.