A coupon in trading and investment refers to the interest payment a bond issuer makes to bondholders. It is a periodic payment made usually on an annual or semi-annual basis, as a return on the principal investment. The coupon rate is fixed at the time of issuance, and it is expressed as a percentage of the bond’s face value. For example, a $1,000 bond with a 5% coupon would pay the bondholder $50 per year in interest payments.
Coupons can be part of the reason why bond investments appeal to investors. As coupons are paid out consistently, investors seeking a regular income stream may fulfil their needs. Coupon payments can also be reinvested, allowing investors to benefit from the power of compounding. However, like all forms of investing, coupon reinvesting carries risk and investors should ensure they have a clear understanding of their investments before making them.
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