Coupon Rate
What It Is:
The coupon rate of a bond is the amount of interest paid per year as a percentage of the face value or principal.
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How It Works/Example:
If you own at $1,000 bond with a coupon rate of 4%, you will receive interest payments of $40 a year until the bond reaches maturity.
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Why It Matters:
The term coupon rate used to have a much more literal meaning than it does today. To receive interest payments in the past, bondholders would have to clip a coupon from their physical certificate of bond ownership and take it to the bank to obtain the cash. Today, your broker is more likely to deposit the payments straight into your account. Some bonds, known as zero-coupon bonds, do not pay coupons, and instead are sold at a price less than par value.
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Cached on February 4, 2012, 9:39 am