The value of investments can fall as well as rise, and you may get back less than you invested. Past performance is no guarantee of future results.

A coupon (also knowns as the coupon rate, coupon percent rate and nominal yield) is used to define the annual interest applicable on a bond. This is expressed as a percentage of the face value of the bond.

Coupon definition

A coupon (also knowns as the coupon rate, coupon percent rate and nominal yield) is used to define the annual interest applicable on a bond. This is expressed as a percentage of the face value of the bond. 

A $1000 bond with a coupon of 5% would pay the bondholder $50 per year.

Importantly, bonds also have a current yield. As bonds can be traded before they mature, the market value of those bonds fluctuates. This causes the bond’s current yield to change and diverge from the bond’s coupon, or nominal yield.

When the $1000 bond is issued, the nominal yield and current yield are both the same at 5%. However, the bond is then traded in the future at a lower value of $900, which would cause the current yield to rise to 5.6%, while the nominal yield, or coupon, remains unchanged at 5%.

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