An Introduction to Bond Coupon and Interest Rates

Understanding the bond coupon rate is essential if you plan on investing in the bond market. Here are the basics of the bond coupon and interest rates.

Bond Coupon

The coupon rate of a bond is essentially the interest rate that the bond issuer is going to pay. If you have a 10 percent coupon, this means that you are going to be able to collect 10 percent interest over the course of the year. The term bond coupon came from when bonds had actual coupons attached to them that you would tear off. You could redeem these coupons to get the interest payment that you were owed.

Interest Payments

When you own a bond, the bond issuer is going to pay you regular interest payments for loaning them money. Most of the time, companies will pay interest every six months. In some cases, you can purchase bonds that pay interest every single month. Other times, you will get a bond that pays you on a quarterly basis.

Fixed vs Variable

Some bond coupon rates are fixed and pay the same amount of interest every time. Other bonds carry with them a variable interest rate. These bonds have interest rates that are tied to market interest rates. 

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