Coupon Rate.

In plain English

The coupon rate is the yearly interest a bond promises to pay, calculated as a percentage of its face value (usually $1,000). A 5 percent coupon on a $1,000 bond pays $50 a year, typically split into two $25 payments. The rate is set when the bond is issued and does not change, no matter what the bond later trades for in the market. Because it is fixed to face value, the coupon rate alone does not tell you your actual return if you buy the bond at a different price; for that you need yield to maturity.

01Why it matters

The coupon rate tells you the dollar income a bond will hand you each year, which matters if you are buying bonds for steady cash flow. But it is only the starting point, because the price you pay changes what you actually earn.

02The math, step by step

A bond has a $1,000 face value and a 4 percent coupon rate, so it pays $40 a year, usually as two $20 payments. That $40 stays the same every year until maturity, even if the bond's market price rises to $1,100 or falls to $900. Your real return on a price other than $1,000 is captured by yield to maturity, not the coupon rate.

03What this is NOT

04Receipts

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