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Coupon Rate
> Introduction to Coupon Rate

### What is the definition of coupon rate in finance?

The coupon rate, in the realm of finance, refers to the fixed interest rate that a bond issuer promises to pay to bondholders periodically over the life of the bond. It is expressed as a percentage of the bond's face value, also known as its par value or principal. The coupon rate serves as a crucial determinant of a bond's cash flows and plays a significant role in assessing its attractiveness to investors.

When a company or government entity issues a bond, they borrow money from investors who purchase these bonds. The coupon rate is the interest rate that the issuer agrees to pay the bondholders as compensation for lending them money. It represents the annual interest payment per unit of the bond's face value.

For instance, consider a bond with a face value of \$1,000 and a coupon rate of 5%. This means that the issuer will pay bondholders \$50 in interest annually (\$1,000 x 0.05). The interest payments are typically made semi-annually or annually, depending on the terms of the bond.

The coupon rate is predetermined at the time of issuance and remains fixed throughout the life of the bond. This fixed nature distinguishes it from other interest rates, such as market interest rates, which can fluctuate over time. Consequently, the coupon rate determines the amount of income an investor will receive from owning the bond.

The coupon rate also influences the price of a bond in the secondary market. When market interest rates rise above a bond's coupon rate, newly issued bonds tend to offer higher coupon rates to attract investors. As a result, existing bonds with lower coupon rates become less desirable, leading to a decrease in their market value. Conversely, if market interest rates fall below a bond's coupon rate, existing bonds with higher coupon rates become more attractive, potentially increasing their market value.

It is important to note that the coupon rate is distinct from the yield to maturity (YTM), which represents the total return an investor can expect to earn if they hold the bond until maturity. The YTM takes into account the bond's current market price, its coupon rate, and the time remaining until maturity. If a bond is purchased at a discount or premium to its face value, the YTM will differ from the coupon rate.

In summary, the coupon rate in finance refers to the fixed interest rate that a bond issuer promises to pay to bondholders periodically over the life of the bond. It determines the amount of income an investor will receive from owning the bond and influences its market value relative to prevailing interest rates. Understanding the coupon rate is essential for investors seeking to evaluate and compare different bonds based on their potential returns.