what is coupon rate

A coupon rate is the interest rate paid on a bond by its issuer for the term of the security. It is the fixed annual rate at which a guaranteed-income security, typically a bond, pays its holder or owner. The coupon rate is calculated by dividing the sum of the annual coupon payments by the par value. For example, if a bond has a face value of $1,000 and a coupon rate of 5%, then it pays total coupons of $50 per year. Typically, this will consist of two semi-annual payments of $25 each. The coupon rate is fixed when the bond is issued, and it remains unchanged until the bond matures. The yield to maturity (YTM) is the percentage rate of return for a bond assuming that the investor holds it until maturity. The coupon rate is the annual income an investor can expect to receive while holding a particular bond. Bonds can be issued with variable rates, which are often pegged to LIBOR or another publicly distributed yield.