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Updated 2mo ago.
Updated 2mo ago.
The coupon is the interest rate that a bond pays to its holder, expressed as a percentage of the face value. For example, a 4% coupon on a $1,000 bond means you receive $40 in interest per year. Payments are usually semi-annual (twice a year).
If you buy a $1,000 Government of Canada bond with a 3.5% coupon, you receive $17.50 every six months ($35 per year). This amount is fixed for the entire life of the bond, regardless of what happens to interest rates.
When the Bank of Canada raises its policy rate, new bonds are issued with higher coupons. Older bonds with lower coupons lose value on the secondary market.
Understanding the coupon helps you evaluate the predictable income from a bond. Important: the coupon is not the same as the current yield or yield to maturity. If you buy a bond below its face value, your actual return will be higher than the coupon. This is a key concept for understanding how bond ETFs like ZAG.TO work.