What is coupon payment?
It's the annual interest payment made by the issuer of a bond to the bondholder until it reaches maturity. The coupon payment – or simply coupon is expressed as a percentage of the bond's value at the time it was issued.
Where have you heard about coupon payment?
The term coupon comes from once popular bearer bond certificates. Bearer bonds are not registered so the possession of the certificate is proof of ownership. Each one has detachable coupons attached to it – one for each scheduled interest payment over the life of the bond – that the owner detaches and presents for payment on the coupon's due date. This is known as 'clipping the coupon'.
What you need to know about coupon payment...
A $2,000 bond with a fixed coupon payment of 8% will $160 a year. Payments are usually made twice a year, so in this case the bondholder would receive 2 payments of $80.
Although the market value and yield of these bonds can fluctuate, the annual payments are a fixed percentage of the bond's par value so they remain constant, providing the bond is held until maturity and the bond issuer doesn't default.
Some bonds, such as variable rate demand bonds and floating-rate notes have variable coupon payments that are adjusted at specific intervals according to a set calculation for example LIBOR + 7%.
Not all bonds have coupon payments. Zero coupon bonds don't pay interest throughout the life of the bond but instead are issued at a discount to their maturity value.