Part 14: Coupon

Welcome back to The Apricot Investor’s Glossary! Welcome back to The Apricot Investor’s Glossary! In past posts, we’ve explored the world of securities, including stocks and bonds. But did you know that bonds can provide you with a regular income stream? Today, we’ll delve into this key feature of bonds: coupons.

Coupons: Your Bond’s Regular Paycheck

Imagine you’ve taken out a loan from a bank to buy a car. You agree to repay the loan over a set period, and in addition to the principal, you also pay interest to the bank for the privilege of borrowing the money. Bond coupons work in a similar way, but in reverse!

When you buy a bond, you’re essentially lending money to a company or government. In return, the issuer promises to pay you back the principal (the original amount you invested) at a future date (the maturity date). But that’s not all! They also agree to pay you regular interest payments, known as coupons, over the life of the bond.

Just like the bank receives regular interest payments from you on your car loan, bondholders receive regular interest payments, known as coupons, from the bond issuer

How Coupons Work

The coupon rate is the annual interest rate that the bond issuer promises to pay. It’s usually expressed as a percentage of the bond’s face value (the principal amount). For example, if a bond has a face value of $1,000 and a coupon rate of 5%, you’ll receive $50 in interest each year.

Coupon payments are typically made semi-annually, meaning you’ll receive two payments of $25 each year. However, the frequency can vary depending on the bond.

Why Coupons Matter

• Fixed Income: Coupons provide a predictable stream of income for bondholders. This can be particularly attractive for investors seeking stability and regular cash flow.
• Yield Calculation: The coupon rate is a key factor in determining a bond’s yield, which is the overall return an investor can expect to receive. A bond’s yield takes into account both the coupon payments and any potential gains or losses from changes in the bond’s market price.

Factors Affecting Coupon Rates

Several factors influence a bond’s coupon rate, including:

• Prevailing Interest Rates: Market interest rates play a major role. When interest rates rise, newly issued bonds tend to have higher coupon rates.
• Creditworthiness of the Issuer: Issuers with higher credit ratings (lower risk of default) can offer lower coupon rates.
• Maturity Date: Bonds with longer maturities often have higher coupon rates to compensate investors for the longer time they are lending their money.

Interested in learning more about bonds and how they can fit into your investment portfolio? Check out our blog post on how to buy bonds through Apricot Capital. 

It’s important to remember that investments are subject to market fluctuations and carry inherent risks. Consider your financial goals and risk tolerance before investing.

Apricot Capital is regulated by the Central Bank of Armenia.

The examples in this text are for illustrative purposes only. This does not constitute investment advice or a recommendation to buy or sell any specific investment instrument. The past performance mentioned in this text is not indicative of future results.