A coupon payment is the amount of interest which a bond issuer pays to a bondholder at each payment date.
Bond indenture governs the manner in which coupon payments are calculated. Bonds may have fixed coupon payments, variable coupon payments, deferred coupon payments and accelerated coupon payments.
In fixed-coupon payments, the coupon rate is fixed and stays the same throughout the life of the bond. This results in a fixed coupon payment each period.
In variable coupon payments, the coupon rate varies directly or indirectly with another variable. A change in coupon rate means a change in coupon payment. For example, a bond may have coupon rate equal to LIBOR + 3%. Since LIBOR is variable, the coupon rate and coupon payments are variable too for this bond.
In deferred coupon bonds, initial coupon payments are deferred for a certain period while in accelerated coupon bonds, the coupon rate is high initially but decreases over the life of the bond.
Coupon payment for a period can be calculated using the following formula:
|Coupon Payment = F ×||c|
Where F is the face value of the bond, c is the annual coupon rate and n represents the number of payments per year.
Walmart Stores Inc. has 3 million, $1,000 par value bonds payable due on 15th August 2037. They carry a coupon rate of 6.5% while the payments are made semiannually. Its current yield is 4.63% while its yield to maturity is 3.92%.
The coupon payment on each of these bonds is $32.5 [=$1,000 × 6.5% ÷ 2]. This means that Walmart Stores Inc. pays $32.5 after each six months to bondholders.
Please note that coupon payments are calculated based on the stated interest rate (also called nominal yield) rather than the yield to maturity or the current yield.
by Obaidullah Jan, ACA, CFA and last modified on