What is Coupon?
A coupon — in German: Kupon — is the interest payment you receive for holding a bond. The name comes from the detachable coupons on old paper bonds that holders would clip and redeem for payment.
A coupon is the periodic interest payment made by a bond issuer to bondholders. It's calculated as a percentage of the face value and paid at regular intervals (usually annually in Germany, semi-annually in the US) until maturity.
How Coupons Are Calculated
Coupon payment = Face value × Coupon rate. A €1,000 bond with a 3% coupon pays €30 per year. German federal bonds typically have face values of €100, so a 2.5% Bund pays €2.50 annually per unit.
Payment Frequency
German government bonds pay coupons annually. US Treasury bonds pay semi-annually. Corporate bonds vary. The frequency affects how you compare yields — semi-annual payments compound differently than annual ones.
Zero-Coupon Bonds
Some bonds pay no coupons at all. Called Nullkupon-Anleihen or discount bonds (like German Bubills), they're issued below face value and repay the full face value at maturity. The difference is your return.
Fixed vs. Floating Coupons
| Aspect | Fixed Coupon | Floating Coupon |
|---|---|---|
| Rate | Set at issuance, never changes | Adjusts periodically |
| Reference | None | Tied to benchmark (e.g., EURIBOR) |
| Interest rate risk | Higher | Lower |
| Price volatility | Higher | Lower |
| Example | 2.5% Bundesanleihe | EURIBOR + 1.5% FRN |
Practical Example: Coupon Payments
You hold €10,000 nominal of a Bundesanleihe with a 2.0% coupon. Each year on the payment date, you receive €200 (€10,000 × 2.0%). This payment is guaranteed regardless of the bond's market price — even if the bond trades at €9,000 or €11,000.
Frequently Asked Questions
What is a bond coupon in simple terms?
A coupon is the interest payment you receive for lending money to the bond issuer. It's paid regularly (usually once a year in Germany) until the bond matures.
Why is it called a coupon?
Historical paper bonds had physical coupons attached. Holders would cut ('clip') them and present them to receive interest payments. Today it's just a term for the interest rate.
Can the coupon rate change?
For fixed-rate bonds, never — the coupon is set at issuance. Floating-rate bonds have coupons that adjust based on a reference rate like EURIBOR.
Is a higher coupon always better?
Not necessarily. Higher coupons often mean higher credit risk. Also, high-coupon bonds may trade above par, reducing your yield. Compare YTM, not just coupons.
Understand Bonds — Step by Step
Our free 15-chapter course explains how bonds work — from the basics to portfolio construction.