Omni's coupon payment calculator is a simple tool that lets you quickly determine the periodic coupon payment on a bond. Bonds are one of the most reliable sources of fixed income for investors. This article discusses coupon payments, how to calculate coupon payments, and the different types of coupon payments. If you want to learn more about bonds, check out our bond yield and bond price calculators.
What is coupon payment?
The coupon payment is the interest paid by a bond issuer to a bondholder at each payment period until the bond matures or it is called. The payment schedule can be quarterly, semiannually or annually, depending on the agreed time.
When a bond is first issued, the bond's price is its face value. The bond issuer pays a bondholder a percentage of the face value every year. This percentage is also referred to as the coupon rate or nominal yield. Consequently, the coupon rate determines the total amount paid as coupon payments in a year.
How to calculate bond coupon payment?
Assuming you purchase a 30-year bond at a face value of $1,000 with a fixed coupon rate of 10%, the bond issuer will pay you:
$1,000 * 10% = $100 as a coupon payment. If the bond agreement is semiannual, you'll receive two payments of $50 on the bond agreed payment dates.
You can quickly calculate the coupon payment for each payment period using the coupon payment formula:
Coupon payment = face value * (annual coupon rate / number of payments per year)
= $1,000 * (10% / 2) = $1,000 * 5% = $50
With the coupon payment calculator, you can find the periodic coupon payment for any bond by simply inputting the number of payments per year on the bond indenture.
Let's say that, after five years, you decided to sell the bond for $1,100. The new bondholder will still earn $100 per year. But while you were earning 10% on your $1,000 investment, the return or current yield on the new bondholder’s investment is:
$100/$1,250 = 0.91 = 9.1%.
Therefore, while a bond's coupon rate or nominal yield may remain the same throughout the bond duration, the current yield changes with the bond's market value.
The formula to calculate the current yield on a bond is:
Current yield = annual coupon payments/market value of the bond
Except when you're buying a bond at its face value, you should be concerned about its current yield when evaluating its yield to maturity or yield to call.
Types of coupon payments
Based on the type of bond and its coupon interest rates, coupon payments can be classified as:
Fixed coupon payment - The amount paid in each period is constant throughout the life of the bond because the coupon rate remains fixed.
Variable coupon payment – The amount paid in each period varies because the coupon rate is linked to a reference rate of interest, such as LIBOR or Euribor. For example, a bond indenture can define coupon rate equal to LIBOR rate plus 0.20%. In that case, the coupon rate gets recalculated periodically.
Deferred coupon payments - When the initial coupon payments are deferred for a certain period.
Accelerated coupon payments – Here, the initial coupon payments are high but decrease over the bond's life.
Why is a bond payment called a "coupon"?
The name "coupon" originally referred to physical coupons affixed to a bond certificate. In the past, a bond issuer gives an investor a bond certificate with coupons equal to the number of payments during the bond term. When it's time for interest payment, the investor will have to present a coupon to get their payment, hence the name. Although bond ownerships are now recorded electronically, the name has remained.
How to calculate the annual coupon payment?
If you want to calculate the annual coupon payment for a bond, all you have to do is multiply the bond's face value by its annual coupon rate. That means if you have a bond with a face value of $1000 and an annual coupon rate of 10%, then the annual coupon payment is 10% of $1000, which is $100.
How to find the coupon payment?
Using the coupon payment formula, you can find the coupon payment for any bond:
- Divide the annual coupon rate by the number of payments per year. For instance, if the bond pays semiannually, divide the coupon rate by 2.
- Multiply the result with the bond's face value to get the coupon payment.
The coupon payment formula allows you to use the coupon payment calculator as a bond coupon rate calculator or a semi-annual coupon rate calculator if you provide a bond's coupon payment, face value, and the number of payments per year.
What is the difference between nominal yield and current yield of a bond coupon payment?
The nominal yield is the coupon amount earned as a percentage of the bond's face value. It usually remains constant for bonds with fixed coupon rates. In contrast, the current yield of a bond depends on its market value. The current yield rises and declines with the market value.