Glossary · UK
What is Coupon Rate (Bonds)?
The fixed annual interest rate a bond pays on its face value, expressed as a percentage and usually paid in regular instalments.
Full Definition
The coupon rate of a bond is the fixed annual rate of interest it pays on its face (nominal) value, expressed as a percentage and usually paid out in regular instalments -- commonly semi-annually for UK government bonds (gilts), though frequency varies by issuer. For example, a bond with a GBP 1,000 face value and a 4% coupon rate pays GBP 40 a year in interest, regardless of what the bond's market price does after issue. The coupon rate is set when the bond is issued and does not change over the bond's life, but the bond's market price moves with prevailing interest rates and the issuer's perceived creditworthiness, which means the "running yield" (coupon divided by current market price) and the yield to maturity (which also factors in any gain or loss to be made if the bond is bought below or above face value and held to redemption) can differ significantly from the coupon rate itself, particularly for a bond bought well after issue. Bonds issued with no coupon at all (zero-coupon bonds, including gilt strips) instead pay no periodic interest and are simply issued at a discount to their face value, with the investor's return coming entirely from the difference between the discounted purchase price and the full amount repaid at maturity.