In the world of investing, a "coupon" isn't a cents-off bonus for savvy shoppers. This financial term, however, use to refer to actual coupons presented by investors to receive their interest payments. Calculating a coupon payment lets you know how much you'll receive in interest for your investment. But even if you're not a mathematician, the coupon payment formula is a simple calculation that you can master with ease.
What Is a Coupon Rate?
A coupon rate is simply the interest paid on a certain type of investment called a fixed-income security, typically represented by a bond. Fixed-income securities are so named because they pay fixed interest rates at periodic intervals until a security's maturity date, at which time investors receive the principal amount they invested. Over the life of the bond, its coupon rate doesn't change, regardless of market interest fluctuations. Municipal bonds, corporate bonds and Treasury bonds are examples of fixed-income security products.
Determine a Security's Par Value
Before performing the math that results in a coupon payment calculation, first determine your security's par value. Par value is the face value of a bond, which is not necessarily the price you pay to invest in the bond. A bond issuer may sell a bond for a discount or a premium, for example, because of market interest rates. If a bond sells for more than its par value, it's trading for a premium; if a bond sells for less than its par value, it's trading for a discount.
Figure the Annual Coupon Payment
After you determine your security's par value, figure the total number of the periodic interest payments you receive in a year. If each of your payments is an equal amount, multiply the number of payments by the amount of each of your annual interest payments – the coupon payments – to learn the total annual coupon rate.
Remember the equation: total annual coupon payment = (periodic payment) x (number of payments each year).
If each of your payments varies, your total annual coupon payment is simply the sum of all the annual payments.
The Coupon Rate Formula
After you've calculated the total annual coupon payment, divide this amount by the par value of the security and then multiply by 100 to convert this total to a percent. Remember the equation: coupon rate formula = (total annual coupon payment) divided by (par value of the security) x 100 percent.
Coupon Rate Formula Examples
Using the math explained above, take a look at some actual examples plugged into the coupon rate formula.
Twice-yearly equal coupon payments. If your security's par value is $1,000, and you receive two coupon payments of $25 each, your annual payment is $50 ($25 x 2 payments each year). Your coupon rate is 5 percent: $50 (total annual coupon payment) divided by $1,000 (par value) x 100 percent.
Unequal periodic payments. Your security may pay, for example, three payments each year, and these payments may be different amounts. You may receive a payment of $25 at the end of four months, a second payment of $15 at the end of nine months and a third payment of $15 at the end of the year – for a total annual coupon payment of $55. If the par value of your security is $1,000, your coupon rate is 5.5 percent: $55 (total annual coupon payment) divided by $1,000 (par value) x 100 percent.