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Coupon

The coupon of a bond is the yield at its face value.

Expanded Definition

The coupon of a bond specifies the amount of interest. For example, a $1000 face value bond with a coupon of 6% will pay $60 per year as interest, usually in two $30 payments per year.

Once a bond is issued, it will trade at its market value. That will usually cause the value of the bond to change so the bond will pay the current market interest rate to the buyer. Hence, in the case of a bond paying $60/year in interest, if interest rates change to 7%, the market value of the bond should be 60/.07 or $857.

The coupon is a constant value which the bond issuer or borrower is contractually obligated to pay for the life of the bond. If the payment is not received, the issuer is in default and can be forced into bankruptcy court.

When the bond matures, on the maturity date, the borrower is obligated to refund the face value of the bond plus the latest interest payment on the bond. Hence, when held to maturity the bond owner will collect the full face value regardless of its value if traded in the bond market.

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