The coupon rate is the interest rate a bond’s issuer promises to pay on the bond’s face value.
For a bond with a $1,000 face value and a 5% annual coupon rate, the promised annual interest is $50, often divided into periodic payments. The coupon rate is set when the bond is issued and generally remains fixed for a fixed-rate bond.
Coupon rate is different from current yield and yield to maturity. Current yield divides the annual coupon payment by the bond’s current market price, while yield to maturity incorporates the purchase price, coupon payments, time to maturity, and repayment of principal. Because market prices change after issuance, a bond’s coupon rate can stay constant even as its market yield changes.