Coupon payments

Coupon payments are associated with bonds. Bonds are a kind of debt instrument issued by the Government, corporates and banks when they want to borrow money from investors to finance big projects. They issue bonds to investors with a certain coupon rate or interest rate. For instance, a power company, Energy Grid Pvt. Ltd., may issue bonds of 5-year maturity with 8% coupon rate. This means Energy Grid will compensate its bond investors at 8% interest rate for the money they are lending to it by buying its bonds. The reason is simple. If investors don’t get an attractive interest rate from these bonds, they would rather invest their money in another bond or other avenues that gives them better return for the same level of risk involved.

Each investor who buys the bonds from Energy Grid will receive 8% interest payment from Energy Grid every year. Since coupon payments are usually semiannual in nature, the bond investors will receive a coupon of say ` 40 if the face value of each bond is ` 1,000. Bonds are always issued at a certain face value. Investors who buy the bonds at the time of issuance pay the face value to own each bond. If the face value of Energy Grid’s bond is ` 1,000, each bond holder will receive 4% coupon payment every six months until the bonds mature. Thus, in this case, each bond holder receives a coupon payment of ` 40 semiannually. These semiannual payments that are promised by the bond issuer are called coupons of the underlying bond.

Most often, the coupons are simply reinvested at the prevailing rates (interest rates) and the accumulated interest / coupon is paid along with the initial principal investment at the time of maturity.