Coupon
The interest a bond pays its holder, stated as an annual percentage of the bond’s face value and paid on fixed dates.
A bond’s coupon is the interest the issuer promises to pay, expressed as a percentage of the face value. A bond with ₹1,000 face value and an 8% coupon pays ₹80 a year, often in instalments — ₹40 every six months, for example. The name comes from the paper coupons bondholders once clipped and presented for payment.
Why it matters
The coupon determines the cash you receive while you hold the bond. For anyone who wants regular income, the coupon schedule — how much, how often and on which dates — is usually the first thing to check.
How to read it
- The coupon rate applies to face value, not to the price you paid. If you buy the bond at ₹1,050, you still receive ₹80 a year, so your yield is below 8%.
- Some bonds have floating coupons linked to a reference rate; zero-coupon bonds pay none at all.
- A coupon is the issuer’s promise, not a certainty. How reliable it is depends on the issuer’s creditworthiness.
Common misconceptions
- “The coupon is my return.” Your return depends on the price you paid, the coupons received, what you reinvest them at, and the price when you sell or the bond matures. YTM brings these together.
- “A higher coupon is always better.” An unusually high coupon often signals higher credit risk.
- “Coupons are paid whatever happens.” Payments depend on the issuer’s ability to pay; default and restructuring are possible.
In India: Coupon income from bonds is generally taxed as interest at your income-tax slab rate. Check the latest provisions or speak to a tax professional.
Formula
Annual coupon = Face value × Coupon rate. Coupon per payment = Annual coupon ÷ Payments per year
Worked example
For illustration, assume a bond with face value ₹1,000 and a 7.5% coupon paid half-yearly. The annual coupon is ₹75, paid as two instalments of ₹37.50.
Figures are for illustration only — not a forecast or a recommendation.
Related terms
Face value
The nominal amount of a bond — what the issuer repays at maturity and the base on which coupon payments are calculated.
YTM
Yield to Maturity
The annualised return on a bond bought at today’s price and held to maturity, if every payment arrives as promised and coupons are reinvested at that rate.
Current yield
A bond’s annual coupon divided by its current market price — a quick measure of income relative to what you pay today.
Zero-coupon bond
A bond that pays no periodic interest; it is bought at a discount to face value and repays the full face value at maturity.
Credit risk
The risk that a bond issuer or borrower fails to pay interest or repay principal in full and on time.
Accrued interest
Interest a bond has earned since its last coupon date but not yet paid; a buyer usually pays it to the seller on top of the quoted price.