Bond coupon — what it is and how it works
What is a bond coupon, what types of coupons exist and how it affects bond price. Explanation for beginning investors.
What is a bond coupon?
A bond coupon is a periodic interest payment that the bond issuer pays to the holder. The name comes from times when paper bonds had physical coupons to tear off — an investor would cut the coupon and exchange it for cash.
The coupon is expressed as a percentage of the bond's face value and paid annually or semi-annually.
Quick Answer
A bond coupon is a periodic interest payment the issuer pays the holder, expressed as a percentage of face value and paid annually or semi-annually — a 1,000 PLN bond with a 5% coupon pays 50 PLN a year. Coupons can be fixed (set for the bond's life, like Polish OTS and TOS), floating (tied to WIBOR or inflation + margin, like COI and EDO), or absent in zero-coupon bonds sold at a discount. The coupon is nominal; actual yield to maturity depends on purchase price, and prices move opposite to interest rates. Educational information, not investment advice.
Example
Bond with face value of 1,000 PLN with 5% coupon:
- Annual payment: 50 PLN
- With semi-annual payments: 25 PLN every 6 months
Types of coupons
Fixed coupon (fixed rate)
Interest rate set for the entire life of the bond. E.g. 5-year bond with 4.5% coupon — you receive 4.5% of face value each year.
Polish treasury bonds OTS (3-year) have fixed coupons.
Floating coupon (floating rate)
Interest rate changes depending on a reference indicator (e.g. WIBOR, CPI inflation).
Polish bonds COI (4-year) and EDO (10-year) have floating coupons — linked to inflation + margin.
Zero-coupon bond
No coupons. Bond sold at discount, profit comes from difference between purchase price and face value. Example: treasury bills.
Coupon vs yield to maturity (YTM)
Coupon is nominal payment. Real yield depends on purchase price:
- Buy bond with 5% coupon at 100% of face value → YTM = 5%
- Buy same bond at 95% of face value → YTM > 5%
- Buy at 105% of face value → YTM < 5%
On secondary market bond price changes, but coupon remains fixed.
Coupon and interest rates
When interest rates rise:
- New bonds offer higher coupons
- Old bonds with lower coupons lose value (their price drops)
When rates fall — the opposite. That's why bond prices and interest rates move in opposite directions.
Polish treasury bonds — what coupons?
| Bond | Period | Coupon |
|---|---|---|
| OTS | 3 months | Fixed |
| DOS | 2 years | Fixed (1st year), floating (2nd year — WIBOR) |
| TOS | 3 years | Fixed |
| COI | 4 years | Fixed (1st year), floating (2-4 year — inflation + margin) |
| EDO | 10 years | Fixed (1st year), floating (2-10 year — inflation + margin) |
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FAQ
Is a bond coupon the same as the bond's yield?
No. The coupon is a fixed cash payment expressed as a percentage of face value. The yield depends on what you actually paid for the bond — if you buy below par, your yield exceeds the coupon; if you buy above par, your yield falls below the coupon. Coupon and yield only match when the bond trades exactly at face value.
What's the difference between a fixed-rate and a floating-rate coupon?
A fixed-rate coupon stays constant for the bond's entire life — predictable, but exposed to inflation and rate changes. A floating-rate coupon resets periodically based on a reference (WIBOR, CPI inflation, etc.), so payments rise and fall with market conditions. Each profile suits a different risk preference.
How is current yield calculated?
Current yield equals the annual coupon divided by the bond's current market price. For a bond with a 50 PLN annual coupon trading at 950 PLN, current yield is roughly 5.26%. It's a quick snapshot and ignores capital gains or losses at maturity — for that, use yield to maturity (YTM).
Are bond coupons taxed in Poland?
Coupon income from bonds is generally subject to the 19% capital gains tax (Belka tax) for individual investors. Tax treatment can change and depends on bond type and investor status — for personal situations, consult a tax adviser or current Ministry of Finance guidance.
What happens to my coupon if interest rates change after I buy?
Your coupon payments stay exactly the same — they were locked in at issuance. What changes is the market price of the bond: if rates rise, your fixed coupon becomes less attractive and the bond's price drops; if rates fall, the bond appreciates. Holding to maturity neutralizes price moves but still leaves you with the original coupon stream.
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