Legal Definitions - coupon yield

Coupon yield refers to the annual interest rate that a bond issuer promises to pay to the bondholder, calculated as a percentage of the bond's face value (also known as par value). This fixed interest payment is often called the "coupon payment" because, historically, bonds had physical coupons that bondholders would clip and redeem for interest. It represents the income an investor receives from the bond based on its original terms, regardless of market price fluctuations after issuance.

• Example 1: Corporate Bond

  Imagine "Global Energy Corp." issues a bond with a face value of $1,000 and promises to pay $45 in interest annually until the bond matures. An investor purchases this bond.

  Illustration: The coupon yield for this bond is 4.5% ($45 annual interest / $1,000 face value). This 4.5% is the fixed percentage return the bondholder expects to receive each year from Global Energy Corp., based on the bond's initial terms, providing a predictable income stream.

• Example 2: Government Treasury Bond

  A national government issues a 5-year Treasury bond with a face value of $10,000 and an advertised annual interest rate of 2.0% to fund public projects.

  Illustration: The coupon yield for this government bond is 2.0%. This means the government will pay the bondholder $200 ($10,000 * 0.02) in interest each year until the bond matures. This 2.0% represents the consistent annual income the bondholder receives from the government, reflecting the bond's original contractual terms.

• Example 3: Municipal Bond for Infrastructure

  A local city government issues a municipal bond to finance the construction of a new public library. The bond has a face value of $5,000 and pays $175 in interest every year.

  Illustration: The coupon yield for this municipal bond is 3.5% ($175 annual interest / $5,000 face value). This 3.5% is the consistent annual return the bondholder receives from the city, representing the original interest rate agreed upon when the bond was first issued to fund the library project.