Coupon
Definition
A coupon is the periodic interest payment a bond pays, expressed as a rate on face value (e.g., 13% per year). Paid annually, semi-annually, or quarterly.
Key Takeaways
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Coupon rate is set at issuance; YTM moves with the market.
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Coupon amount = coupon rate × face value (per year, split by frequency).
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Current yield = annual coupon ÷ clean price (doesn’t include pull-to-par).
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Settlement uses dirty price (clean + accrued interest).
Nigeria Example
Face value ₦1,000,000, 13% coupon, semi-annual: pays ₦65,000 every six months.
Notes
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Accrued interest builds between payment dates; buyer pays dirty price.
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High coupon generally lowers duration (more cash earlier).
Common Pitfalls
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Confusing coupon rate with yield (YTM).
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Forgetting accrued interest at purchase/sale.
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Comparing current yields across bonds with different maturities/frequencies.
Mini-FAQ
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Do coupons change? Usually fixed; some bonds are floating (tied to a reference rate).
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When are coupons paid? On scheduled dates set at issuance (e.g., semi-annual).
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Does higher coupon mean higher return? Not necessarily—price and YTM matter.
Related Terms
Bond · Yield to Maturity (YTM) · Current Yield · Clean Price · Dirty Price · Duration
