What is a coupon set?

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Definition: Coupon rate is the rate of interest paid by bond issuers on the bond’s face value. It is the periodic rate of interest paid by bond issuers to its purchasers. The coupon rate is calculated on the bond’s face value (or par value), not on the issue price or market value. For example, if you have a 10-year- Rs 2,000 bond with a coupon rate of 10 per cent, you will get Rs 200 every year for 10 years, no matter what happens to the bond price in the market.

Description: The government and companies issue bonds to raise money to finance their operations. When you buy a bond, the bond issuer promises periodic (annually or semi-annually) interest payments on the money invested at the coupon rate stated in the bond certificate. The bond issuer pays the interest annually until maturity, and after that returns the principal amount (or face value) also.

Coupon rate is not the same as the rate of interest. An example can best illustrate the difference. Suppose you bought a bond of face value Rs 1,000 and the coupon rate is 10 per cent. Every year, you'll get Rs 100 (10 per cent of Rs 1,000), which boils down to an effective rate of interest of 10 per cent.

However, if you bought the bond above its face value, say at Rs 2,000, you will still get a coupon of 10 per cent on the face value of Rs 1,000. It means you'll still get Rs 100. But, since you bought the bond at Rs 2,000, the rate of interest this time would only be 5 per cent (Rs 100 of Rs 2,000). Likewise, if you bought the bond below its face value, say at Rs 500, you'll still receive Rs 100 every year, but this time the interest rate would be 20 per cent (Rs 100 of Rs 500).