Interest rate is one of the first factors taken into consideration when making any investment decision. In the bond market, when researching interest rates, one comes across the term coupon. In theory, coupons and interest are the same thing. Bonds offer coupon payments on investments made by bondholders.
Defining Coupon Payment
Government bodies and corporate entities issue bonds for the public to collect funds for their operations, development, and other projects. From a different standpoint, the bond issuers borrow capital from the investor for a specific period (maturity period). The interest rate offered by the bond issuers is the incentive promised to investors.
Suppose a bond is issued at a face value of INR 5000 with an annual 8% interest rate for a maturity period of 10 years. So, the investor will receive 8% of the face value as interest or coupon payment every year for 10 years.
Types of Coupon Payments
Various types of bonds exist with different features. In terms of coupon payments,
Coupon payments can differ from one bond to another. Bonds can have the following coupon payments. We shall calculate the coupon amounts based on the example given above.
| Coupon Payment Type | Description | Coupon Amount |
| Yearly Coupon Payments | Investors will receive one coupon payment every year | (8% of 5000) INR 400 |
| Half-Yearly Coupon Payments | Investors will receive two coupon payments every year | (INR 400 / 2) INR 200 |
| Quarterly Coupon Payments | Investors will receive four coupon payments every year | (INR 400 / 4) INR 100 |
| Monthly Coupon Payments | Investors will receive 12 coupon payments every year (one per month) | (INR 400 / 12) INR 33.3 |
Some more important factors to note:
- There are fixed-rate bonds as well as floating-rate bonds. The former provides coupon payments at the same rate throughout the maturity period. However, the interest rates are reset at regular intervals for the latter. So, the coupon payments may vary.
- Zero coupon bonds exit. These bonds do not offer any interest rate. Therefore, there is no coupon payment.
- If the bonds are traded in the secondary market, the new bondholder receives the coupon payments after the transaction date.
- If the bond is sold between two coupon dates, the new bondholder is responsible for paying the accumulated interest to the previous bondholder until the transaction date.
Wrapping Up!
Coupon payments have pre-decided dates, which, along with other important details, are mentioned in the bond document. On the date of a coupon payment, the amount is automatically transferred to the bondholder’s account.
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FAQs About What is Coupon Payment?
1. Why is it called a payment coupon?
Earlier, coupons or certificates were issued as ownership of the bonds. Even though transactions have become digital, the term coupon payment has stayed in the market.
2. Who makes the coupon payments?
The government or corporate entity that issued the bond, i.e., borrowed the capital from the investors, is responsible for making timely coupon payments to the investors.
3. What is a variable coupon?
Bonds with floating interest rates do not generate interest at the same rate throughout the maturity period. Since the rate of interest is reset regularly, the coupon payments tend to vary, hence the name, variable coupon.
