coupon rate
The word 'coupon' comes from an old practice: bonds once had paper coupons attached that the holder clipped off and redeemed for each interest payment. The coupon rate is what told you how big those payments were. Even though physical coupons are long gone, the name stuck for the interest rate printed on a bond.
The coupon rate is the fixed annual interest rate stated on a bond, applied to its face value to determine the periodic interest the issuer pays. A bond with a 1,000 face value and a 6 percent coupon pays 60 of interest per year — typically 30 every six months. The crucial thing is that the coupon rate is fixed for the life of the bond and is set at issuance; it does not move with the market. By contrast, the market interest rate (the return investors currently demand) floats up and down, and the gap between the two is exactly what makes a bond sell at a discount or premium.
The coupon rate matters because it locks in the issuer's cash interest payments for years, giving both the company and investors certainty about that stream. But it is not the same as the bond's true cost of borrowing. If a 6 percent-coupon bond is sold at a discount because the market wanted 7 percent, the company's real interest cost (the effective rate) is 7 percent, not 6 percent. Confusing the coupon rate with the effective rate is one of the most common bond mistakes, which is why effective-interest amortization exists.
Two bonds both have a 1,000 face value. Bond A has a 4 percent coupon and Bond B has an 8 percent coupon. Bond A pays 40 a year and Bond B pays 80 a year — for the entire life of each bond — no matter how market interest rates move afterward.
The coupon rate fixes the cash interest forever; only the bond's price reacts to changing market rates.
The coupon rate (the stated rate on the bond) is not the same as the yield or effective rate (the actual return given the bond's price) — they are equal only when the bond is issued exactly at face value.