Coupon (bond)
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This article refers to the expression "coupon" used in finance.
The coupon or coupon rate of a bond (ie fixed interest security) is the amount of interest paid per year expressed as a percentage of the face value (or nominal value or par value - all mean the same) of the bond.
For example if you hold $10,000 or £10,000 nominal of a bond described as a 4.5% loan stock, you will receive $450 or £450 in interest each year (probably in two instalments of $225 or £225 each).
Not all bonds have coupons. Zero coupon bonds are those which do not pay interest, but are sold to investors at a price less than the par value paid out when the bond has matured.
The origin of the expression "coupon" is that bonds were historically issued as bearer certificates, so that possession of the certificate was conclusive proof of ownership. A number of coupons, one for each scheduled interest payment covering a number of years, were printed on the certificate. At the due date the owner would detach the coupon and present it for payment of the interest.
The market price of the bond will be determined by the market, taking into account among other things
- the amount and date of the redemption payment at maturity
- the amounts and dates of the coupons
- the quality of the issuer
- the yield offered by other similar bonds in the market.
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