These are the interest payments.
The coupon (or coupon rate) is the annual interest rate that is paid by this bond.
Bonds pay interest in arrears
This interest rate is fixed when the bond is issued.
Coupons are generally fixed in even multiples of (1/8 percent)
The interest on a bond is always GROSS
Also known as Fixed Rate Coupon Bonds.
Lets suppose you bought a newly issued 10 year USA treasury bond at its nominal price for $1,000 that pays interest at 6% a year.
The coupon for this bond is 6% and you would receive two payments a year of $30, assuming payments are made semi-annually.
The coupon rate on a new bond is determined by the yield at maturity of existing bonds in the secondary market with the same maturity date.
The issuer has to offer a coupon rate that is at least equal to the yield at maturity on existing bonds otherwise no-one will buy them.
Sometimes coupons can even be paid quaterly.
Also known as Step Up
The interest rates increase (or step up)
The coupon increases during the life of the bond
They are callable at each step-up
They do not pay interest for the first couple of years.
Coupon rate is typically higher that other issues.
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