Coupon Payment – Definition and Example
Coupon is the amount of interest that an investor receives from the bond on the interest payment date. When interest is paid more than once per year, then the investor receives a number of coupons in a single year. The amount of coupon is determined in advance and is derived from the particulars of the bond.
For example, if the coupon rate on a bond is 7%, and interest is distributed twice each year; then assuming that the bond has a $1,000 face value, each coupon will amount to $35.
The interest rate on a bond can be either a fixed rate, or a floating rate. A fixed rate does not change over the life of the bond it consists of a given percentage of the bond’s face value. In most cases, a floating interest rate is determined relative to a given base interest rate, and is adjusted according to changes in the base interest rate.