A coupon payment is a payment made to the holder of a bond for the interest that bond accrues while it is maturing. This is typically made as a semi-annual payment, so only half of the interest owed on the bond is paid at a time. The usage of the term “coupon” stems from the largely abandoned practice of attaching coupons to a bond that could be separated or “clipped” from the bond and presented to the issuer for payment of interest. A coupon payment often determines the yield of a bond at any given time.
Typically dependent on the coupon rate or interest rate of a bond, a coupon payment refers to a payment made to the holder of a bond. A bond is essentially a loan made by one person or agency to another. When someone buys a bond, regardless of whether it is from a company or government, he or she is paying money that is to be paid back when the bond matures. Bonds often have interest rates or coupon rates associated with them, and a coupon payment is an annual or semi-annual payment of that interest.
The amount paid for a coupon payment is based on the face value, also called the par or par value, of the bond itself. If someone purchases a bond for $1,000 US dollars (USD), for example, with a 10% interest or coupon rate, then he or she receives $100 USD each year as a coupon payment. This is typically paid out semi-annually, so he or she would receive a payment of $50 USD every six months. The payment is made at the same rate regardless of the actual or market value of a bond, though this is often considered when evaluating the “yield” of a bond.
Yield refers to the amount paid in a coupon payment, compared to the current market value of a bond. In the previous example, the yield would be 10% since the market value was still at $1,000 USD and an annual payment of $100 USD was being received by the bond holder. If the market value of the bond decreased, to $750 USD for example, then the yield would become about 13.3% since the bond was worth less but still paying out the same interest amount. On the other hand, if the value of the bond increased to $1,200 USD, then the yield would become about 8.3% as the bond would be worth more while paying out an interest rate that is effectively lower than it was initially. This yield is typically considered more than coupon payment amounts, since it reflects the current value of the bond rather than a static value.
