What is a Coupon Rate?
A coupon rate is the interest percentage stated on the face of a bond or similar instrument. This is the interest rate that a bond issuer pays to a bond holder, usually at intervals of every six months. The current yield may vary from the coupon rate, depending on the price at which an investor buys a bond. For example, if an investor pays less than the face amount of a bond, the current yield is higher than the coupon rate. Conversely, if the investor pays more than the face amount, the current yield is lower than the coupon rate.
The term is an outmoded one. It refers to the past practice of issuing coupons with bonds. Bond holders presented these coupons at stated intervals in order to receive payment from the bond issuer. Currently, bond holders are registered with the issuer, so that electronic or check payments can be sent straight to bond holders at regular intervals.
How to Interpret a Coupon Rate
A high coupon rate can be an indicator that the financial circ*mstances of an issuer are not the best, forcing it to offer a higher interest rate to investors. Alternatively, a high rate may be required because the market interest rate is also high, and a high coupon rate is needed to attract investors.
Example of a Coupon Rate
For example, if the coupon rate is 8%, then the issuer pays $80 of interest per year on a bond that has a $1,000 face value.
Terms Similar to Coupon Rate
The coupon rate is also known as the nominal yield.
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