Coupon

The word "coupon" is not a metaphor — it has a literal origin. Before electronic record-keeping, bonds were printed on paper with a row of detachable strips along the edge. Each strip was a coupon; the bondholder would physically tear one off and hand it to a bank to collect that period's interest payment. Modern bonds are electronic, but the term stuck.

The coupon rate is set on the day the bond is issued and never changes. If a government issues a 10-year bond with a 4% coupon and a face value of $1,000, it will pay $40 every year (often split into two $20 payments every six months) for the entire life of the bond, regardless of what happens to interest rates afterward.

This fixedness is the key point. Because the coupon doesn't move, changes in market interest rates make the bond's price move instead, which is what drives bond yield fluctuations. A bond with a high coupon relative to current rates will trade at a premium (above face value); one with a low coupon will trade at a discount. Understanding this relationship is foundational to reading the bond market.

Zero-coupon bonds are a notable exception — they pay no periodic interest at all, and are instead sold at a steep discount to face value, with the full face value repaid at maturity.