Bond coupon — what it is and how it works

What is a bond coupon?

A bond coupon is a periodic interest payment that the bond issuer pays to the holder. The name comes from times when paper bonds had physical coupons to tear off — an investor would cut the coupon and exchange it for cash.

The coupon is expressed as a percentage of the bond's face value and paid annually or semi-annually.

Example

Bond with face value of 1,000 PLN with 5% coupon:

• Annual payment: 50 PLN
• With semi-annual payments: 25 PLN every 6 months

Types of coupons

Fixed coupon (fixed rate)

Interest rate set for the entire life of the bond. E.g. 5-year bond with 4.5% coupon — you receive 4.5% of face value each year.

Polish treasury bonds OTS (3-year) have fixed coupons.

Floating coupon (floating rate)

Interest rate changes depending on a reference indicator (e.g. WIBOR, CPI inflation).

Polish bonds COI (4-year) and EDO (10-year) have floating coupons — linked to inflation + margin.

Zero-coupon bond

No coupons. Bond sold at discount, profit comes from difference between purchase price and face value. Example: treasury bills.

Coupon vs yield to maturity (YTM)

Coupon is nominal payment. Real yield depends on purchase price:

• Buy bond with 5% coupon at 100% of face value → YTM = 5%
• Buy same bond at 95% of face value → YTM > 5%
• Buy at 105% of face value → YTM < 5%

On secondary market bond price changes, but coupon remains fixed.

Coupon and interest rates

When interest rates rise:

• New bonds offer higher coupons
• Old bonds with lower coupons lose value (their price drops)

When rates fall — the opposite. That's why bond prices and interest rates move in opposite directions.

Polish treasury bonds — what coupons?

How Freenance can help

Freenance tracks your bonds and automatically includes paid coupons in portfolio return calculations. You'll see how much you really earn on the bond portion.

👉 Track bonds in Freenance — freenance.io