The annual interest rate paid by a bond issuer on the bond's face value, expressed as a percentage. A bond with Rs 1,000 face value and 7% coupon pays Rs 70 annually.
The coupon rate is the annual interest rate that a Bond issuer promises to pay bondholders, calculated as a percentage of the bond's Face Value. The term "coupon" originates from the era of physical bond certificates, which had detachable coupons that holders would present to collect interest.
For example, a Government of India 10-year bond with a 7.26% coupon rate and Rs 100 face value pays Rs 7.26 per year per bond (typically Rs 3.63 every six months). Indian G-Secs pay semi-annual coupons, while most corporate bonds also follow semi-annual schedules.
The coupon rate is fixed at issuance and does not change over the bond's life. However, the bond's yield (effective return) changes as the bond's market price fluctuates. If the 7.26% coupon bond's price rises from Rs 100 to Rs 105, the current yield drops to 7.26/105 = 6.91%. Conversely, if the price falls to Rs 95, the current yield rises to 7.64%. This inverse relationship between bond prices and yields is the most fundamental concept in fixed-income investing.
In India, coupon rates on new G-Sec issues are determined through RBI's auction process. The rates reflect prevailing interest rate conditions — during the 2020 low-rate environment, new 10-year G-Secs were issued with coupons around 5.8-6.2%, while during the 2023 tightening cycle, coupons rose to 7.2-7.4%. Corporate bonds offer higher coupon rates than government bonds to compensate for credit risk — an AA-rated PSU bond might offer 8%, while a BBB-rated corporate might offer 10-11%.
For investors, the coupon rate determines the income stream. Retirees and conservative investors often prefer bonds with higher coupon rates for regular income. However, focusing solely on coupon rate can be misleading — the yield to maturity (YTM), which factors in the purchase price, coupon payments, and principal repayment at maturity, is the correct measure of total expected return. A zero-coupon bond, which pays no coupon but is issued at a deep discount (say Rs 50 for Rs 100 face value), can still deliver attractive returns.
Formula
Annual Coupon Payment = Face Value x Coupon Rate
Current Yield = Annual Coupon / Market PriceIndia Context
G-Sec coupon rates set via RBI auctions. Semi-annual payment is standard. RBI Retail Direct allows direct G-Sec investment. Current 10-year G-Sec coupon is around 7.1-7.4%.