Coupon Rate
Coupon Rate
The annual interest rate that a bond issuer promises to pay bondholders, expressed as a percentage of the bond's par (face) value. The coupon rate is fixed at issuance and determines the dollar amount of periodic interest payments, typically paid semi-annually. A bond with a 5% coupon rate and $1,000 par value pays $50 annually ($25 every six months).
A corporation issues 20-year bonds with a 6% coupon rate at $1,000 par value. An investor who buys one bond receives $60 annually (6% of $1,000), paid as $30 every six months. Even if market interest rates rise to 8% and the bond's market price falls to $850, the coupon payment remains $60 per year because the coupon rate is fixed at issuance.
Students often confuse coupon rate with current yield or yield-to-maturity. The coupon rate NEVER changes after issuance (it's fixed), while current yield and YTM fluctuate with market price. A 5% coupon bond is always a 5% coupon bond, but its current yield changes when the bond trades above or below par.
How This Is Tested
- Calculating the annual or semi-annual dollar payment amount from the coupon rate and par value
- Understanding that coupon rates are fixed at issuance and do not change with market conditions
- Distinguishing between coupon rate (fixed) and current yield or YTM (variable)
- Recognizing the inverse relationship between bond prices and market interest rates while coupon payments remain constant
- Determining appropriate coupon rates for different credit qualities and maturities
Regulatory Limits
| Description | Limit | Notes |
|---|---|---|
| Standard bond par value | $1,000 | Most corporate and municipal bonds use $1,000 face value |
| Standard payment frequency | Semi-annual | Interest typically paid twice per year (every 6 months) |
Example Exam Questions
Test your understanding with these practice questions. Select an answer to see the explanation.
Jennifer purchases a newly issued municipal bond with a 4% coupon rate and $1,000 par value, maturing in 10 years. Six months later, market interest rates rise to 6% for similar bonds, and her bond's market price falls to $850. She calls you concerned about her interest payments. What should you tell her?
B is correct. The coupon rate is fixed at issuance and never changes. Jennifer will continue receiving $20 semi-annually ($40 annually = 4% of $1,000 par value) regardless of market price fluctuations. The coupon payment is calculated on the original $1,000 par value, not the current market price of $850.
A is incorrect because coupon payments do not change when bond prices fall; they are based on par value, not market price. C is incorrect because the coupon rate does not adjust to match current market rates; only the market price changes. D incorrectly calculates the payment on market price ($850) instead of par value ($1,000). While Jennifer's current yield has increased (now $40/$850 = 4.71%), her actual dollar payment remains unchanged at $40 per year.
The Series 65 exam tests your ability to explain to clients why coupon payments remain constant while bond prices fluctuate. Understanding this fixed nature of coupon rates is essential for client education and managing expectations during interest rate changes.
Which of the following best describes the coupon rate on a bond?
B is correct. The coupon rate is the annual interest rate set when the bond is issued, expressed as a percentage of the bond's par (face) value. This rate remains fixed for the life of the bond and determines the dollar amount of interest payments. For example, a 5% coupon on a $1,000 bond always pays $50 annually.
A describes a variable-rate or floating-rate note, not a fixed coupon bond. The coupon rate itself never adjusts to market conditions. C describes yield-to-maturity (YTM), which includes both coupon payments and capital gains/losses if purchased at a discount or premium. D describes current yield, which is calculated as (annual coupon payment / current market price), not the coupon rate itself.
The Series 65 exam frequently tests the precise definition of coupon rate and how it differs from other yield measures. This foundational knowledge is critical for explaining bond characteristics to clients and making appropriate fixed-income recommendations.
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A is correct. Calculate: Annual payment = $1,000 × 7.5% = $75. Since bonds pay semi-annually, divide by 2: $75 / 2 = $37.50 per payment. The investor receives $37.50 every six months, totaling $75.00 annually.
B ($62.50) incorrectly divides $1,000 by 16 or uses the wrong calculation method. C ($75.00) is the total annual payment, not the semi-annual payment; this is a common error when forgetting bonds pay twice per year. D ($150.00) incorrectly doubles the annual payment instead of halving it. Remember: semi-annual means two payments per year, so divide the annual amount by 2.
Coupon payment calculations appear frequently on the Series 65 exam. Candidates must remember that most bonds pay semi-annually, requiring division of the annual payment by 2. This calculation is essential for portfolio income projections and client planning.
All of the following statements about coupon rates are accurate EXCEPT
C is correct (the EXCEPT answer). The coupon rate does NOT increase when market interest rates rise. Coupon rates are fixed at issuance and never change. When market rates rise, the bond's MARKET PRICE decreases to make the fixed coupon payment more attractive (higher current yield and YTM), but the coupon rate itself remains unchanged.
A is accurate: coupon rates are permanently fixed when the bond is issued; they do not adjust regardless of market conditions. B is accurate: the coupon rate multiplied by par value determines the annual dollar payment (e.g., 5% × $1,000 = $50/year). D is accurate: higher coupon rates mean larger dollar payments; a 6% coupon pays more than a 4% coupon on the same par value.
The Series 65 exam tests your understanding that coupon rates are fixed while market prices and yields are variable. This distinction is fundamental to explaining bond market dynamics to clients and understanding the inverse relationship between bond prices and interest rates.
A 30-year Treasury bond was issued 10 years ago with a 3% coupon rate when market rates were low. Today, similar new 20-year Treasury bonds are issued with 6% coupon rates. Which of the following statements about the older bond are accurate?
1. The older bond's coupon rate is now 6% to match current market conditions
2. The older bond still pays 3% of its par value annually
3. The older bond's market price is likely trading below par value
4. An investor buying the older bond today will receive larger dollar payments than from the new 6% bond
B is correct. Statements 2 and 3 are accurate.
Statement 1 is FALSE: The coupon rate NEVER changes after issuance. The older bond retains its original 3% coupon rate regardless of current market conditions. Only newly issued bonds can have different coupon rates.
Statement 2 is TRUE: The older bond continues paying 3% of its $1,000 par value annually ($30 per year), exactly as it did when issued 10 years ago. Coupon payments are fixed and based on the original coupon rate.
Statement 3 is TRUE: Since new comparable bonds offer 6% coupons while this bond only pays 3%, investors will only buy the older bond at a discount (below $1,000 par value). The price must fall to make the fixed $30 annual payment competitive with new 6% bonds.
Statement 4 is FALSE: The older bond pays $30 annually (3% × $1,000) while the new bond pays $60 annually (6% × $1,000). The older bond pays HALF the dollar amount, which is why its price must decrease to offer competitive total returns through capital appreciation.
The Series 65 exam tests understanding of how fixed coupon rates interact with changing market conditions. When market rates rise, older bonds with lower coupon rates trade at discounts. When market rates fall, older bonds with higher coupon rates trade at premiums. This concept is central to bond valuation and portfolio management.
💡 Memory Aid
Think of the coupon rate as a frozen promise: Once the bond is baked (issued), the coupon rate is frozen solid and never thaws (never changes). It always pays the same percentage of par value, not market price. Remember: "Coupon = Cast in stone" while market prices and yields bounce around. A 5% coupon bond pays $50 per year on $1,000 par forever, even if the bond trades at $800 or $1,200.
Related Concepts
This term is part of this cluster:
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Where This Appears on the Exam
This term is tested in the following Series 65 exam topics: