Coupon: an important word in bonds terminology

You can have a good guess at working out what a lot of bond related terminology means, such as maturity. One of the very important terms, but one that is not immediately obvious, is this: coupon.

It seems a little odd perhaps, but the COUPON in bonds simply refers to the interest that is paid on a bond. There may seem no apparent link between the two but there you go, that's what it means - perhaps it is for historical reasons or something like that.

Note that there are different types of fixed interest bond, so coupon payments may be the same interest every year, but not necessarily the case as some are linked to a benchmark of some sort.

Virtually always coupons are paid once a year, although there are some exceptions that will pay more regularly, which in practice again virtually always means twice a year.

Finally, there are some bonds that pay no interest, and this is referred to as a zero coupon bond. This might seem like the least attractive product in the world, but it may come as no surprise that there is infact a compensating factor: they are bought at a discount to their face value, so you make the return on your investment at redemption.

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Coupon: an important word in bonds terminology

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