What is meant by a bond's coupon rate?

A bond's coupon rate refers to the interest rate that the issuer of the bond agrees to pay the bondholders on the bond's face value. It is typically expressed as a percentage and represents the annual interest payment for holding the bond. This rate is important because it helps investors understand the return they can expect from the bond if held until maturity, provided the issuer does not default.

When a bond is issued, the coupon rate is set based on various factors, including the prevailing interest rates, the creditworthiness of the issuer, and market conditions at the time of issuance. Bondholders receive this interest payment periodically, usually semi-annually, which can be a significant source of income, especially for investors seeking fixed-income securities.

Understanding the coupon rate is essential for evaluating a bond's attractiveness as an investment, as it influences both the bond's price in the secondary market and the overall yield to maturity investors can expect. It is distinct from other related concepts such as the face value, which is the amount the bond will pay at maturity, or the market interest rate, which fluctuates based on broader economic conditions.