Coupon

A coupon is the periodic interest payment a bond makes to its holder, expressed as a percentage of face value. A bond with 1,000 dollars face value and a 5 percent coupon pays 50 dollars a year, typically in two installments. The name survives from the era when bonds were paper certificates with physical coupons to clip and redeem.

Why it matters

The coupon is fixed at issuance, but the bond's price is not, and the interplay between the two produces yield, the actual return a buyer earns at today's price. When market rates rise above a bond's coupon, its price falls until the yield catches up, which is how 2022 delivered historic losses to supposedly safe bond portfolios. Coupons compensate lenders for three things at once: time, credit risk, and expected inflation over the bond's life.

In the gold vs bitcoin debate

Gold pays no coupon and neither does bitcoin, the oldest objection to holding either. The standard reply is that a coupon is not free money but payment for bearing counterparty and inflation risk, which bearer assets do not carry. The objection has real force when interest rates are high, since the income foregone by holding zero-yield assets grows, and less force when rates sit near zero, as they did for most of the 2010s while both assets thrived.