Coupon Bond
What Is a Coupon Bond?
A coupon bond is a bond that pays periodic interest payments, known as coupon payments, to investors during the life of the bond. These payments are made at a fixed rate based on the bond’s face value until the bond matures.
At maturity, the investor receives the bond’s principal amount.
Why It Matters
Coupon bonds provide predictable income through regular interest payments, making them popular among investors seeking stable returns. Many retirement portfolios include coupon bonds because they generate consistent cash flow.
The coupon rate determines how much interest the bondholder receives.
How Coupon Bonds Work
A coupon bond includes several key components:
- face value (principal amount)
- coupon rate (interest rate)
- maturity date
Interest payments are usually made semiannually or annually until the bond reaches maturity.
Example
A $1,000 bond with a 5% coupon rate pays $50 in interest each year until the bond matures.
Coupon Bond vs Zero-Coupon Bond
- Coupon bonds pay regular interest payments.
- Zero-coupon bonds do not pay periodic interest but are sold at a discount and mature at full value.
FAQs About Coupon Bonds
What does the term “coupon” mean?
It refers to the periodic interest payments made to bondholders.
Do coupon rates change during the life of the bond?
Typically no. Most coupon bonds have fixed rates.
How often are coupon payments made?
Many bonds pay interest twice per year.
Related Terms
