Coupon Rate

The coupon rate is the annual interest rate stated in a bond's indenture, expressed as a percentage of the bond's face (par) value. It is set at issuance and remains fixed for the life of the bond (for fixed-rate bonds). The coupon rate determines the dollar amount of interest payments: a $1,000 bond with a 5% coupon rate pays $50 per year in interest. Importantly, the coupon rate is NOT the same as the bond's yield — the yield depends on the price paid for the bond. If an investor buys that 5% coupon bond at $950 (a discount), the current yield is 5.26% ($50/$950); if bought at $1,050 (a premium), the current yield is 4.76% ($50/$1,050). Coupon rates are influenced by prevailing interest rates, the issuer's credit quality, the bond's maturity, and supply and demand dynamics at the time of issuance. Zero-coupon bonds have a coupon rate of 0% and instead are sold at a deep discount to par value.