Coupon
A coupon in the context of finance/investments/bonds and fixed income refers to the periodic interest payment made to the bondholders by the issuer of a bond. It represents the fixed income that the bondholder receives for lending money to the issuer.
Example #1
For example, if you own a bond with a face value of $1,000 and a 5% coupon rate, you will receive $50 every year ($1,000 x 5%) as your interest payment.
Example #2
Another example could be a company issuing bonds with a 3% coupon rate to raise funds for expansion. Investors who purchase these bonds will receive 3% of the bond's face value as periodic interest payments.
Misuse
Misuse of coupons in the context of finance can occur when investors are misled by deceptive marketing practices that overstate the actual returns or benefits associated with a particular bond or investment product. It's crucial to protect against such misuse to prevent investors from making uninformed decisions based on false promises.
Benefits
Coupons provide a predictable income stream for bondholders and can be a source of steady cash flow. They offer a fixed return on investment, which can be attractive to investors seeking stability and regular income.
Conclusion
Understanding coupons in the realm of finance is essential for investors to grasp how fixed income securities work and how they can contribute to a diversified investment portfolio. By being aware of how coupons function, investors can make informed decisions that align with their financial goals.