Coupon (Bond)

Definition

A coupon is the periodic interest payment a bond issuer makes to the bondholder, expressed as a fixed percentage of the bond's face (par) value. The term originates from bearer bond certificates that had detachable paper coupons — investors would physically clip and present these to claim interest. In modern electronic form, coupons are credited directly to the bondholder's DEMAT account. The annual coupon amount is:

Annual Coupon = Coupon Rate × Face Value

Indian G-Secs and most corporate bonds pay coupons semi-annually (every six months). SEBI's NCS Regulations 2021 require the coupon frequency, rate type (fixed/floating/zero), and ex-coupon date to be disclosed in the offer document and on the exchange platform. SEBI also mandates coupon payment within 2 business days of the scheduled date for listed bonds.

How it is computed

Three primary coupon structures exist in Indian markets:

1. Fixed coupon: Rate set at issuance, unchanged throughout tenor. Example: a NABARD bond at 7.50% pays ₹3.75 per ₹100 face value every six months for its entire life.
2. Floating-rate coupon: Reset periodically (quarterly or semi-annually) against a benchmark — most commonly the 91-day T-bill rate (set via RBI auction) or MIBOR. Formula: Coupon = Benchmark Rate + Spread. Example: T-bill + 50 bps.
3. Zero coupon: No periodic payments. Issued at a deep discount to face value; investor's entire return comes as the price accretes to face value at maturity.

The ex-coupon date is the record date after which a new buyer does not receive the upcoming coupon. In Indian markets, this is typically 1–2 business days before the coupon payment date (T+1/T+2 settlement). Trading between two coupon dates involves accrued interest — the pro-rata coupon earned since the last payment date — added to the clean price to produce the dirty (invoice) price.

Why it matters for investors

The coupon rate is the bond's contractual cash yield. For investors who depend on regular income (retirees, trusts), coupon frequency and reliability are critical. However, the coupon rate alone does not indicate the bond's total return — that is captured by YTM. Key implications: (1) Reinvestment risk: Interim coupons must be reinvested; if market rates fall, coupons are reinvested at lower rates, eroding total return vs. the original YTM promise. Zero-coupon bonds eliminate reinvestment risk entirely since no intermediate cash flows exist. (2) Duration impact: High-coupon bonds have lower Macaulay Duration than low-coupon bonds of equal maturity — early cash flows shorten the weighted-average life. (3) Tax treatment: Coupon income from corporate bonds and G-Secs is taxed as interest income at the investor's slab rate (§57, Income-tax Act). Post-Finance Act 2023, this is distinct from capital gains treatment under §50AA for listed bonds held in DEMAT.

Worked example

The GoI 7.26% 2033 G-Sec (ISIN IN0020190042) has a fixed coupon of 7.26% on ₹100 face value, paid semi-annually on 22 January and 22 July each year. Per ₹100 face value: each coupon payment = ₹3.63. An investor holding ₹10 lakh face value receives ₹36,300 every six months = ₹72,600 per year. If this investor reinvests each coupon at the prevailing 6-month G-Sec rate (say, 6.85%), their realised yield over 10 years will be slightly below the stated 7.26% YTM due to the lower reinvestment rate. Contrast with a zero-coupon G-Sec strip (STRIPS): no interim cash flows, so realised return equals the YTM at purchase exactly.

Caveats

Ex-coupon price drop: Bond prices typically fall by approximately the coupon amount on the ex-coupon date, similar to ex-dividend for equities — this is mechanical, not a value loss. Floating coupon lag: Benchmark resets for T-bill-linked bonds happen quarterly; during rapid rate moves, there is a lag between market rates and coupon adjustment. Tax efficiency: For high-slab-rate investors, deep-discount zero-coupon bonds may offer better post-tax outcomes since capital appreciation (at long-term rates where applicable) may be taxed more favourably than coupon income, subject to Finance Act 2023 provisions.

See also

• Face Value (Bond)
• Yield to Maturity (YTM)
• Zero-Coupon Bond
• Floating-Rate Bond
• Tax on Investments in India

Primary source

• SEBI NCS Regulations 2021 (coupon disclosure): sebi.gov.in — NCS Regulations 2021
• RBI G-Sec FAQs — coupon payment mechanics: rbi.org.in
• Income-tax Act §57 (interest income taxability), Finance Act 2023 §50AA

MintByte is registered with AMFI (ARN-314872) and APMI (APRN-01658). This glossary entry is for educational purposes only and does not constitute investment advice or a recommendation to buy or sell any security.