The term ‘coupon’ originally referred to detachable piece of paper attached to physical bond certificates. In order to collect an interest payment, the investor had to present the physical coupon.
Today, with the rise of technology, most investors and issuers tend to keep electronic records on bond ownership rather than physical records. However, the term ‘coupon’ is still used in the trading industry to describe a bond's nominal yield.
A coupon rate is the annual interest rate paid out by a bond’s issuers, expressed as a percentage of the bond’s par value. Therefore, the coupon payment that bondholder receives is the annual interest paid starting from the bond's issue date until it maturity. Those in the financial industry may also refer to the coupon as ‘coupon percent rate’ or ‘nominal yield’.
A bond’s coupon rate is calculated based on the bond’s face value (or par value), rather than the market value or issue price.
Example: Investors with a 10-year €10.000 bond that has a coupon rate of 10% will receive €1.000 every year for 10 years, regardless of what happens to the bond price in the market during that time.