Bond Coupon — What It Is and How It Works
What is a bond coupon, what types of coupons exist, and how it affects bond prices. Explanation for beginner investors.
What is a bond coupon?
A bond coupon is a periodic interest payment that the bond issuer pays to the bondholder. The name comes from times when paper bonds had physical coupons to tear off — investors would cut the coupon and exchange it for cash.
The coupon is expressed as a percentage of the bond's nominal value and is paid annually or semi-annually.
Example
A bond with a nominal value of 1,000 PLN and a 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. For example, a 5-year bond with a 4.5% coupon — you receive 4.5% of the nominal value every year.
Polish savings bonds OTS (3-year) have a fixed coupon.
Variable 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 variable coupons — linked to inflation + margin.
Zero-coupon bond
No coupons. The bond is sold at a discount, profit comes from the difference between purchase price and nominal value. Example: treasury bills.
Coupon vs yield to maturity (YTM)
The coupon is the nominal payment. The real yield depends on the purchase price:
- Buy a bond with 5% coupon at 100% of nominal value → YTM = 5%
- Buy the same bond at 95% of nominal value → YTM > 5%
- Buy at 105% of nominal value → YTM < 5%
On the secondary market, bond prices change, but the 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 falls)
When rates fall — the opposite happens. That's why bond prices and interest rates move in opposite directions.
Polish treasury bonds — what coupons?
| Bond | Period | Coupon |
|---|---|---|
| OTS | 3 months | Fixed |
| DOS | 2 years | Fixed (1st year), variable (2nd year — WIBOR) |
| TOS | 3 years | Fixed |
| COI | 4 years | Fixed (1st year), variable (2–4 years — inflation + margin) |
| EDO | 10 years | Fixed (1st year), variable (2–10 years — inflation + margin) |
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