Legal Definitions - coupon interest rate

The coupon interest rate refers to the fixed annual interest rate that a bond issuer promises to pay to the bondholder. It is typically expressed as a percentage of the bond's face value (also known as par value) and determines the regular interest payments, often called "coupon payments," that the bondholder will receive until the bond reaches its maturity date. This rate is established when the bond is first issued and remains constant throughout the bond's life, regardless of fluctuations in market interest rates.

• Example 1: Corporate Bond Issuance

  A large manufacturing company, "Global Motors," decides to issue new bonds to finance the expansion of its production facilities. They offer a 10-year bond with a face value of $1,000 and a 4.5% coupon interest rate. This means that for every bond purchased, Global Motors commits to paying the bondholder 4.5% of $1,000, which is $45, annually for the entire 10-year period. This $45 annual payment is fixed and determined by the 4.5% coupon interest rate set at the time of issuance.

• Example 2: Municipal Project Funding

  The local government of "Harmony City" needs to raise funds to build a new public park and community center. They issue municipal bonds, each with a face value of $5,000 and a 3.0% coupon interest rate. An investor who buys one of these bonds will receive 3.0% of $5,000, or $150, in interest payments from Harmony City each year until the bond matures. The 3.0% coupon interest rate guarantees this consistent annual income for the bondholder.

• Example 3: Investor's Fixed Income Portfolio

  An individual investor, seeking stable income, purchases a bond from a utility company that was issued five years ago. This bond has a face value of $2,500 and a 6.0% coupon interest rate. Even though current market interest rates have dropped to 3%, the investor continues to receive 6.0% of $2,500, which is $150, in interest payments annually from the utility company. The original 6.0% coupon interest rate remains unchanged for the life of that specific bond, providing a predictable income stream.