Definition
A coupon is the periodic interest payment a bond issuer makes to bondholders, normally stated as an annual percentage of face value called the coupon rate.
How it works
For most bonds the coupon rate is fixed at issue, and the annual coupon equals the rate times face value. Payments may be annual, semiannual or quarterly. Floating-rate bonds reset their coupon against a reference rate, while zero-coupon bonds pay none and are issued at a discount.
The coupon rate is not your return, because that also depends on the price paid. Current yield compares the annual coupon with the market price, while yield to maturity also counts the gain or loss between price and face value.
Formula / convention
Annual coupon = Coupon rate × Face value; Current yield = Annual coupon ÷ Market price
Illustrative example
A fictional bond has a HK$1,000 face value and a 6% coupon paid semiannually, so the annual coupon is 6% × HK$1,000 = HK$60, paid as two HK$30 payments. A buyer who pays HK$960 earns a current yield of 60 ÷ 960 = 6.25%, which is higher than the coupon rate but still not the same as yield to maturity.
What to watch for
A high coupon rate is not a measure of safety or return: it may reflect higher credit risk or the interest rates at issue, and coupons are paid only if the issuer is able to pay.