Bond coupon

Before you rely on it

What to check

Multiply coupon rate by face value, divide by payments per year, and confirm that matches the cash you expect.

The common error

Where people go wrong with bond coupon

Computing the coupon off what you paid instead of off face value. A bond bought at a discount still pays on face, and the cash does not shrink because the price did.

Worked through

Bond coupon in plain numbers

A bond has a $1,000 face value and a 5% coupon rate; the coupon is the money: $50 a year, usually paid as two $25 checks. That number is set when the bond is issued and does not move. Suppose the bond's market price drops to $900. The coupon is still $50, but a buyer now pays $900 to receive it, so the return on that price is 5.56%. If the price rises to $1,100, the same $50 yields 4.55%, and the coupon stays put while the price and yield move, which is the whole reason bond prices and interest rates move in opposite directions.

Easily confused

Bond coupon and its neighbours

The coupon is the cash payment. The coupon rate is the percentage that sets its size. Those two are easy to blur, and the difference matters when you read a bond listing; a 5% coupon rate on a $1,000 bond means $50, not 5% of what you paid; the coupon is also not the yield. Yield to maturity accounts for the price you paid and the money you get back at the end. A zero-coupon bond pays no coupons at all and earns through the gap between price and face value. Read coupon, rate and yield as three separate things.

In real decisions

Where bond coupon turns up

Retirees build income from coupons, timing bonds so payments arrive when needed; investors read the coupon to work out the annual cash flow and to judge how much of a return comes from income versus price change. Bond ladders spread coupons and maturities across years. Funds pass coupon income through as distributions. Tax planning also starts here, since coupon interest is generally taxed as ordinary income unless the bond is exempt. Knowing the coupon dates lets you plan cash flow month by month.

Know the edges

Where bond coupon stops being reliable

A coupon is a promise, not a guarantee. If the issuer defaults, payments can stop. Inflation erodes the value of a fixed coupon over long periods. Callable bonds can be redeemed early, which ends the coupon stream when rates have fallen and reinvestment is hardest. Floating-rate bonds reset their coupons, so the figure is not fixed at all, and check the terms for call dates, credit quality and whether the coupon is fixed or variable before relying on any number as income.

Quick answers

What people ask about bond coupon

Do coupon payments change if the bond's price changes? No. The coupon is fixed by the terms at issue. Only the price and the yield move. That is why a bond bought at a discount earns a higher yield than its coupon rate.

How often are coupons paid? Most US corporate and Treasury notes pay twice a year. Some bonds pay annually or quarterly. Check the prospectus for the exact dates.