In bond terminology, what does 'coupon' refer to?

The term 'coupon' in bond terminology specifically refers to the interest payment made on a bond. When a bond is issued, it typically comes with a fixed interest rate, which is expressed as a percentage of the bond's face value, and this rate is known as the coupon rate. Investors receive these interest payments, commonly referred to as coupon payments, at regular intervals until the bond matures, at which point they also receive the principal amount back.

Understanding the role of the coupon is essential for evaluating a bond's yield and overall investment potential. While the principal amount represents the initial investment an investor makes in the bond, and the total return considers both the coupon payments and any capital gains or losses upon selling the bond, the coupon itself focuses solely on the periodic interest payments that provide income to the bondholder. The maturity period, on the other hand, indicates the time frame in which the bond will reach its full value and the principal will be returned to the investor.