what's a coupon in bonds?

A coupon in bonds refers to the annual interest payment made by the issuer to the bondholder until the bond reaches maturity. Here's a detailed breakdown: 1. **Definition and Calculation**: A coupon is the annual interest rate paid on a bond, expressed as a percentage of the face value of the bond. For instance, a $1,000 bond with a coupon of 7% pays $70 annually. Typically, these interest payments are semiannual, meaning the investor receives $35 twice a year. 2. **Historical Context**: Historically, bonds were issued in the form of bearer certificates, and physical coupons were attached to them. The holder had to present these coupons to receive interest payments. Today, the term "coupon" persists to describe a bond's nominal yield, although actual coupons are no longer physically attached to bonds. 3. **Coupon Rate vs. Yield**: The coupon rate is the annual interest rate of the bond, while the yield is the total return rate at maturity, considering price changes. A higher coupon rate can provide a greater income stream for the investor. 4. **Impact of Market Interest Rates**: The coupon rate is set based on market interest rates and does not change until the bond matures. Bonds with higher coupon rates can offer protection against rising interest rates. 5. **Payment Frequency**: Coupon payments are usually made semiannually, although they can be annual, quarterly, or monthly, depending on the terms of the bond. 6. **Role in Bond Pricing**: The coupon rate affects the bond's price. If the prevailing interest rates exceed the coupon rate, the bond price tends to fall, and vice versa. 7. **Investment Considerations**: Investors consider the coupon rate when evaluating bonds, as it indicates the income potential of the investment. A higher coupon rate means a greater income stream, which can be important for income-focused investors. In summary, a coupon in bonds represents the annual interest payment made by the issuer to the bondholder, and it is a key factor in determining the income potential and price of a bond.