The coupon rate is the percentage of a bond’s face value paid as regular interest.
For example, a bond with a $1,000 face value and a 5% annual coupon rate pays $50 of annual interest, usually in scheduled installments. The coupon rate is set when the bond is issued and normally remains fixed for a conventional fixed-rate bond.
The coupon rate is not the same as the bond’s current yield. Current yield divides the annual coupon payment by the bond’s current market price, so it changes when the bond trades above or below face value. A bond’s yield to maturity also accounts for its purchase price, coupon payments, and repayment of principal.
The word coupon comes from historical physical bond certificates, which included detachable coupons that investors presented to receive interest payments.