Bond Coupon

A bond coupon is the periodic interest payment made by the bond issuer to the bondholder. The coupon rate is expressed as a percentage of the bond’s face value and determines how much interest you receive each year. The term “coupon” comes from historical paper bonds that had detachable coupons that investors would physically clip and present to receive interest payments.

What Is a Bond Coupon?

When you buy a bond with a face value of Rs 1,000 and an 8% coupon rate, you receive Rs 80 per year in interest. This payment is the coupon. Most government and corporate bonds in India pay coupons semi-annually (twice per year), meaning you receive Rs 40 every six months.

The coupon rate is fixed at the time of issuance and remains constant throughout the bond’s life for fixed-rate bonds.

Types of Coupons

**Fixed coupon**: the rate stays the same throughout the bond’s life. Most G-Secs, corporate bonds, and PSU bonds in India pay fixed coupons.

**Floating rate coupon**: the rate resets periodically based on a reference rate (e.g., T-Bill yield, repo rate). Floating Rate Savings Bonds from RBI and some corporate bonds use this structure.

**Zero coupon**: no periodic payments. The bond is issued at a deep discount and redeems at face value. The difference is the investor’s return. T-Bills and some special bonds use this.

**Step-up coupon**: the coupon rate increases at set intervals, often used for long-term bonds.

Coupon Rate vs Current Yield vs Yield to Maturity

These are three different ways to measure a bond’s return:

– **Coupon rate**: coupon as % of face value (fixed at issuance)
– **Current yield**: annual coupon / current market price (changes with price)
– **Yield to Maturity (YTM)**: total return if held to maturity, accounting for price premium or discount

If you buy a bond at a premium (above face value), the YTM is lower than the coupon rate. If at a discount, YTM is higher than the coupon rate.

Practical Example

Suresh buys a 10-year G-Sec with face value Rs 10,000 and 7.3% coupon. Every six months, he receives Rs 365 (7.3% / 2 x Rs 10,000). Over 10 years, he receives Rs 7,300 in total coupon payments plus Rs 10,000 principal at maturity. His annual income is Rs 730 regardless of what happens to bond prices in the secondary market.

Key Takeaways

– A bond coupon is the periodic interest payment on the face value of the bond
– Most Indian bonds pay semi-annual coupons; some pay annual coupons
– Coupon rate is fixed at issuance and does not change for fixed-rate bonds
– Coupon rate, current yield, and YTM are different measures of return
– Zero-coupon bonds pay no coupons but are issued at a discount, returning face value at maturity