Coupon (Bond)

If you have ever bought a bond, an RBI Floating Rate Bond, a PSU bond on the NSE, or held a G-Sec inside a debt fund, you have earned a coupon. The coupon is the annual interest the issuer promises to pay on the bond's face value, written as a percentage. A bond with a ₹1,000 face value and an 8% coupon pays ₹80 a year, usually split into half-yearly instalments, regardless of what happens to its market price.

Coupon versus yield

Here is the part that trips up new investors. The coupon is fixed at issue and never changes, but the bond's price moves in the secondary market. If you buy that ₹1,000 bond for ₹950, your effective return, the yield, is higher than 8%; if you pay ₹1,050, your yield is lower. So the coupon tells you the cash the bond throws off, while the yield to maturity tells you the true return based on the price you actually paid.

This is why debt-fund NAVs rise when interest rates fall. New bonds get issued with lower coupons, making older, higher-coupon bonds more valuable, and the fund holding them gains.

Where Indians meet coupons

Most retail investors encounter coupons indirectly, through debt mutual funds that pool dozens of bonds and pass the interest into the NAV. Others buy directly: G-Secs and Treasury Bills via the RBI's Retail Direct platform, tax-free PSU bonds in the secondary market, or corporate bonds on online bond platforms regulated by SEBI.

A quick caution. A juicy double-digit coupon is often a warning, not a gift. High coupons usually mean the issuer is riskier and must pay more to attract lenders, so chasing the headline rate can expose you to default risk.

My take: read the coupon as the bond's promised income, but always pair it with the credit rating and the price you pay. A modest coupon from a AAA-rated PSU is usually a far better deal than a fat coupon from a name you have never heard of. Safety of the principal matters more than the percentage on the label.