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Coupon |
| Term used to describe the annual interest payment that the issuer of
a bond agrees to pay the investor. Historically, a series of paper
coupons were attached to bond certificates to be clipped and redeemed
for payment on the appropriate date. Most bonds are now offered
in book-entry form and payments are made electronically. Typically, recently issued bonds will have coupons with interest rates that are close to current market levels and will therefore have prices near par, or 100. Older bonds, such as a 10-year maturity bond that was issued 5 years ago, may have coupon levels higher or lower than current interest rates depending on the direction of interest rate movements over the previous 5 years. The difference in coupon rates will be reflected in the dollar price of the security; bonds with higher coupon rates than current interest rates will trade at a premium to par, and bonds with lower coupon rates will trade at a discount. |