Coupon Rate

The coupon rate is a bond’s stated annual interest as a percentage of its face value.

Why investors care

It defines the cash the bond pays each year.

Where people go wrong

The coupon is fixed at issue; the bond’s yield moves with the market price.

In the real market

A retiree sees a bond paying a 7% coupon and assumes it is a great income deal. What the headline does not show: rates have fallen, so the bond trades well above its $1,000 face value — a premium that will be lost at maturity. The true yield to maturity is only 4%, because the retiree paid $1,300 for a bond that repays $1,000. The coupon looked generous; the actual return was ordinary. Always read the yield, not just the coupon sticker.

Using it in practice

When buying a bond, compare the yield to maturity rather than the coupon, because it includes any gain or loss from buying above or below face value. The coupon tells you the cash in your pocket; the yield tells you the real deal.

Example in numbers

Key takeaway

The coupon is the bond’s fixed contract; the yield is what the market actually prices. A high coupon on a bond trading above face value can still mean an ordinary return, because the premium is lost at maturity. Always compare yield to maturity rather than coupon rates, since it includes the gain or loss from the purchase price. The coupon tells you the cash in your pocket; the yield tells you the real deal.

Definitions reviewed by the Investing Glossary editorial team.