Coupon rate
Also written Coupon · Nominal yield · Coupon yield
The rate of interest a bond pays, applied to its face value and never to its market price — which is why the coupon tells you the cash flow but not the return.
In plain language
A debt security is a contract: the issuer borrows a sum on stated terms. Three terms define it — the principal, the coupon, and the maturity date.
The coupon is the rate of interest the borrower pays the lender, expressed as a percentage of the face value. The face value of a debenture in India is usually Rs 100 or Rs 1,000. The contract also fixes how often it is paid: annually, semi-annually, quarterly or monthly.
The trap is built into the definition. Once a bond starts trading, its price moves, but the coupon does not. A 12 percent bond pays Rs 12 a year on Rs 100 of face value whether it is trading at Rs 90 or Rs 110. So the coupon computes the cash flow and nothing else. To describe the return, the market uses the word yield.
How it works
Coupon structures vary, and the workbook names each:
- Fixed rate (plain vanilla) — a pre-defined rate at specified intervals, principal repaid at maturity.
- Floating rate — the rate is reset periodically against a benchmark, such as the RBI repo rate. The workbook's illustration: a 5-year bond reset semi-annually against the 1-year yield on central government securities plus a 50 basis point mark-up. Also called variable rate or adjustable rate bonds.
- Zero coupon — no coupon at all; issued at a discount to face value and redeemed at par, the difference being the implied interest. Issued for a long tenor at a steep discount, it is a deep discount bond.
- Inflation indexed — a floating rate bond whose benchmark is the inflation rate.
- Step-up and deferred interest bonds shift the coupon burden later in the life of the bond.
For the registrar, the coupon rate and its periodicity are what drive the interest payment run: on each interest record date the beneficial owner download is taken, the entitlement is computed per folio, and interest warrants or direct credits go out.
The formula
Coupon amount per period = Face value × Coupon rate × (months in period ÷ 12)
Current yield = (Annual coupon ÷ Market price) × 100
The coupon rate sits in the numerator of current yield and nowhere else — the denominator is the price you actually paid.
A worked example
Take the workbook's own case. A bond pays an annual coupon of 12 percent and trades at Rs 109.50:
Current yield = 12 ÷ 109.50 × 100 = 10.96%
The coupon says 12 percent. The buyer at Rs 109.50 earns 10.96 percent on the money actually committed — and still less on a yield-to-maturity basis, because Rs 109.50 will be redeemed at Rs 100.
Now the registrar's side of the same instrument. An issuer has 20 lakh NCDs of Rs 1,000 face value carrying 8.60 percent payable semi-annually:
Per debenture, per half-year = 1,000 × 8.60% × 6/12 = Rs 43
Total half-yearly outflow = 20,00,000 × Rs 43 = Rs 8.60 crore
An investor holding 250 NCDs receives 250 × Rs 43 = Rs 10,750 gross every six months — computed off the beneficial owner position as on the record date, not off what the investor holds on the payment date.
Why NISM asks about it
Chapter 3.1 (Features of a Debt Security) defines the coupon, and Chapter 3 opens its sample questions with "________ of a bond refers to the interest payable on a bond". Chapter 3.3 then makes the examinable distinction between coupon and yield, with the current yield computation above, and Chapter 3.4 runs through the coupon structures. The paired question — why the coupon is not an indicator of return — recurs constantly.
Common exam traps
- The coupon is applied to face value, never to market price. This is the arithmetic error that ruins current-yield questions.
- Coupon ≠ yield. The workbook is explicit: the coupon merely helps compute what cash flows accrue periodically; the return is the yield.
- A zero coupon bond still earns interest. It is embedded in the discount, not paid out periodically.
- A floating rate coupon is reset, not variable within a period. The workbook's example resets every six months and stays put in between.
- Convertible debentures deliberately carry a lower coupon than pure debt, because the investor is also paid in equity upside.
- Government securities have no credit or default risk, so a government coupon and a corporate coupon of the same number are not the same proposition.
Where this is taught
Free preparation for NISM Series IVRelated terms
- Current yieldA bond's annual coupon in rupees divided by its current market price — the cash income the bond throws off this year, ignoring any gain or loss at redemption.
- Face valueThe denomination a company's capital is divided into and carried in its books — fixed, printed on the certificate, and the base on which dividend percentages and stock splits are computed.
- Yield to MaturityThe single discount rate at which a bond's future coupons and redemption amount add up to exactly its market price today — the return you actually earn if you hold it to maturity.
- Convertible debenturesDebentures that turn into equity shares on terms fixed at issue — the investor draws a coupon until conversion, and the company settles the debt in shares instead of cash.
- Zero coupon bondA bond that pays no coupons: it is issued below face value and repays the face value at maturity, so its duration equals its maturity.
- Floating rate bondA bond whose coupon is not fixed but reset at intervals against a benchmark rate plus a stated mark-up — so the interest paid moves with market rates over the life of the bond.
- Accrued interestCoupon earned from the last coupon date up to settlement, paid by the buyer to the seller on top of the negotiated price, because the issuer will pay the whole coupon to whoever holds the bond next.
- Day count fractionThe agreed rule for turning a period into a fraction of a year — the numerator counts days in the period, the denominator days in the year — and it decides every accrual figure in the market.
- Pull to parThe movement of a bond's price toward its face value as maturity approaches — premium bonds drift down to par, discount bonds drift up to par, and at maturity every bond is worth face value.
- Coupon effectThe fact that two bonds with the same issuer and maturity but different coupons show different yields to maturity even when both are priced correctly off the same zero curve — why YTM cannot judge mispricing.
- Yield to CallThe annualised return on a callable bond if the issuer redeems it at the first call date for the call price — YTM with the call price and call date substituted.
- AT1 bondAn Additional Tier 1 bond — an unsecured, perpetual, non-convertible bond that banks issue under Basel III, satisfying RBI's conditions, to shore up their core capital.
- Subordinated debtDebt that ranks below senior debt in a liquidation, paid out just before equity holders — so it carries a higher coupon; Indian banks issue it to shore up Tier II capital.
- Redemption valueWhat the issuer pays at maturity other than the coupon. Above face value the bond is redeemed at a premium, below it at a discount, and equal to it at par.
- Modified DurationMacaulay's duration divided by (1 + yield) — the percentage by which a bond's price moves for a one percentage point change in interest rates, and so the standard measure of interest rate risk.
- Equity Linked DebentureA debt instrument whose interest is tied to the return on an equity index or basket — the issuer parks most of the principal in bonds to protect capital and spends the rest on options to buy the equity upside.
- Inverse floaterA bond whose coupon moves opposite to its reference benchmark — it pays more as market rates fall and less as they rise, the reverse of an ordinary floating-rate bond.
- Credit ratingAn opinion on how likely a borrower is to service an instrument on time, reduced to a symbol by a SEBI-registered rating agency — and reviewed continuously, not fixed for the life of the bond.
- Debt capitalMoney a company borrows — through debentures, bonds, commercial paper or bank loans — which must pay interest and be repaid on maturity, whether or not the company is doing well.
- Foreign Currency Convertible BondA bond issued by an Indian company to investors in foreign currency, paying interest and principal in that currency and convertible into ordinary shares at a price usually set above the market price.
- Amortising bondsBonds in which the borrower repays principal over the life of the bond along with interest, rather than all at maturity — so the stated maturity is only the date of the last instalment.
- Market Linked DebentureA debenture whose return is linked to an underlying index or security rather than being a fixed coupon; since Section 50AA its gains are short-term capital gains taxed at slab, whatever the holding period.
- Present Value Annuity FactorThe number that converts a level stream of equal payments for n periods into its present value at rate r: PVA(n, r) = (1 − (1 + r)^−n) / r. Used with the PV factor to value bonds.
- Fixed income securityA debt instrument under which the issuer promises a fixed coupon at regular intervals and repayment of the face value at maturity — government bonds, corporate bonds, debentures and T-bills.
- Perpetual bondA bond with no maturity date at all — it keeps paying coupons unless called, so it is valued as the present value of an endless coupon stream rather than as a bond that returns principal on a fixed date.
- Dirty priceThe clean price of a bond plus the interest accrued since the last coupon date — what a buyer settling between coupon dates actually pays the seller.
- Effective yieldThe annual rate that would leave an investor with the same amount after one year as the quoted nominal rate does once its more frequent interest payments are taken into account.
- Convertible bondA bond carrying an embedded option that lets the holder exchange it for a specified number of the issuer's equity shares — a plain bond plus an equity conversion right.
- Non-competitive biddingBidding in RBI's government securities auctions without quoting a price or yield — the bidder is allotted at the weighted average price or yield that emerges from the competitive bids.
- Electronic Book ProviderThe stock exchange platform on which privately placed debt securities above SEBI's thresholds must be bid for electronically, with published issue details and system-computed cut-offs.
- Callable bondA bond that the issuer may redeem before its original maturity date — typically exercised when interest rates fall, leaving the investor to reinvest at lower rates.
- Puttable bondA bond that gives the investor the right to seek redemption from the issuer before maturity — useful when interest rates have risen and better-paying bonds are available.
- Masala bondA bond issued outside India by an Indian company but denominated in Indian rupees, so the foreign investor — not the Indian issuer — bears the risk of the rupee falling.