A bond’s coupon sets the amount of interest the bondholder will receive while holding the bond. Although interest on municipal bonds is typically paid twice a year, the coupon is usually expressed as an annual percentage of the principal amount.
For example, a $5,000 bond with a 4 percent coupon will pay $200 in interest each year, or $100 every six months.
For fixed rate bonds, the coupon is set in the bond contract when the bond is issued. It is legally binding and does not change over the term of the bond. As such, it is not affected by subsequent changes in market interest rates – the $5,000 bond with a 4 percent coupon will continue to pay $200 in interest each year, even if interest rates decrease to 3 percent or increase to 5 percent.
A variable interest rate, by contrast, may periodically change or “reset” as it tracks with a specific index such as the London Interbank Offered Rate, or LIBOR.
