Coupon

Study guide: Exam FM-2

A coupon is the periodic interest payment made by a bond issuer to the bondholder, equal to the face value $F$ multiplied by the coupon rate per period $r$ .

$\text{Coupon} = Fr$

For a bond with an annual coupon rate $r_{annual}$ that pays semi-annually, each coupon is $F \cdot r_{annual}/2$ .
Coupons are typically level (the same amount each period) for standard fixed-rate bonds.
The total number of coupon payments equals $n$ , the number of periods until maturity.
Coupons represent the income component of a bond's return; the other component is any capital gain or loss at redemption.

Coupon Payment Amount A $ $5{,}000$ face value bond pays semi-annual coupons at an annual coupon rate of $6\%$ . What is each coupon payment?

Answer The coupon rate per semi-annual period is $r = 6\%/2 = 3\%$ . $\text{Coupon} = Fr = 5000(0.03) = \$150$ The bondholder receives $ $150$ every six months for the life of the bond.