What Is a Bond Coupon? How Coupon Income Is Calculated
A coupon is the interest a bond issuer pays you for lending them money. Here's how coupon income is calculated and what accrued interest is, which often surprises beginners.
What a coupon is
A bond is an IOU. A company or government borrows money and pays a coupon for it: a fixed or floating amount once a quarter, every six months, or once a year. At the end of the term, the face value is repaid.
Example: face value ₽1,000, a 10% annual coupon, paid twice a year. Every six months you receive ₽50 before tax.
Types of coupons
| Type | How it works |
|---|---|
| Fixed | The amount is known in advance for the whole term |
| Floating | Tied to a benchmark rate and changes |
| Variable | The issuer announces a new rate for upcoming periods |
| Zero-coupon | The bond is sold below face value, and the income is the difference |
What accrued interest is
Accrued interest (in Russia, NKD) is the coupon income built up since the last payment. If you buy a bond between payments, you pay the seller the part of the coupon that has accumulated up to the trade date. In return, you receive the full coupon on the payment date. It's not a loss, just a fair settlement.
Coupon yield and yield to maturity
The coupon is calculated from the face value, but you can buy a bond above or below it. That's why the real benchmark is yield to maturity, which takes the purchase price into account. More in the article bonds explained simply and the lesson bonds and ETFs.
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- A coupon is payment for lending your money.
- Accrued interest is an extra payment to the seller that you get back with the coupon.
- Focus on yield to maturity, not just the coupon.
Frequently Asked Questions
Is coupon income taxed?
As a rule, yes: coupon income is subject to income tax. The details depend on the country and the type of bond.
Can an issuer fail to pay the coupon?
Yes, if it runs into money problems; that's called a default. The more reliable the issuer, the lower the risk and usually the lower the coupon.
Why is a high coupon a reason to be cautious?
A high coupon often means the issuer is risky and the market is demanding compensation for that risk.
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