Coupon Rate

Example

• Face Value: ₹1,00,000

• Coupon Rate: 10.5%

• Annual Interest Payment: ₹10,500 (10.5% of ₹1,00,000)

• Monthly Interest Payment: ₹875

In this example, if you invest in a bond with a face value of ₹1,00,000 and a coupon rate of 10.5%, you would receive ₹10,500 annually as interest. This payment is fixed, regardless of the bond’s current market price.

Key Components

1. Face Value: The principal amount on which interest is calculated (e.g., ₹1,00,000).

2. Coupon Rate: The fixed percentage paid as interest annually (e.g., 10.5%).

3. Interest Payment Frequency: Can vary, typically annual, semi-annual, or monthly. For example, ₹875/month for a 10.5% coupon on ₹1,00,000.

4. Maturity Date: The date when the principal amount is repaid (e.g., August 2027 for recent bond issues).

5. Issuer: The entity issuing the bond, which could be a government (e.g., RBI bonds at 8.05% in 2025) or a corporate issuer.

Benefits of Coupon Rate

1.  Predictable Income: Fixed interest payments provide certainty for financial planning. This is key for those relying on steady income from investments.

2. Safety: Government and top-rated corporate bonds usually have low risk. This is especially true for those backed by the Government of India or high-credit-rated companies.

3. Variety: Bonds come in fixed and floating-rate forms. This lets investors choose bonds that match their expectations for future interest rates.

Challenges

1. Interest Rate Risk: If market interest rates rise, fixed coupon bond prices may drop. This makes them less appealing due to the inverse relationship between bond prices and interest rates.

2. Credit Risk: Corporate bonds may face issuer default. Bonds with lower credit ratings are riskier, so investors should check credit ratings before investing.

3. Liquidity: Some bonds, like government savings bonds, may have lock-in periods or limited trading options. This can make it hard for investors to sell them before maturity.

4. Inflation Impact: If inflation outpaces the coupon rate, the real value of fixed interest payments can fall. This erodes the purchasing power of the income.

Conclusion

The coupon rate is key in bond investing. It gives investors a fixed income stream, offering predictability and safety. However, risks like interest rate sensitivity, credit risk, and inflation impact exist. In 2025, understanding these factors is vital for making smart fixed-income investment choices.