What it is
A coupon is the periodic interest payment made by a bond issuer to its bondholders. Historically, physical bonds had detachable coupons that investors would clip and present to receive their interest payment. Today, these payments are typically made electronically. The coupon rate is the annual interest rate paid as a percentage of the bond's face value, and it remains fixed throughout the bond's life.
When a bond is issued, its coupon rate is set, determining the cash flow for investors. If market interest rates rise after issuance, a bond with a lower coupon rate may trade at a discount to compensate investors for the lower fixed payments compared to new bonds. Conversely, if market rates fall, a bond with a higher coupon might trade at a premium. The coupon payment is a direct component of a bond's overall yield calculation.
Why it matters
Coupons provide a predictable income stream for bond investors. They are crucial for calculating a bond's yield and understanding its price sensitivity to interest rate changes.
Reviewed under editorial standardsUpdated September 26, 2026Not investment advice