Lesson 2 of 5 · All lessons in this module
Lesson 2 of 5 · 14 min
Coupons: fixed, floating and zero
Interest on a bond comes in one of three forms: a fixed coupon, a floating coupon that resets with a market reference rate, or no coupon at all with the interest built into a discount price.
In short
- Coupon payment = coupon rate × par ÷ payments per year. Corporate bonds usually pay semiannually.
- Floating-rate notes (FRNs): coupon = market reference rate (MRR) + issuer-specific credit spread.
- The spread is fixed at issue (in basis points; 100 bps = 1%) and reflects credit quality; the MRR resets periodically, so the coupon moves with it.
- Zero-coupon (pure discount) bonds pay nothing until maturity; they are issued below par, and par minus issue price is the interest.
- At maturity a coupon bond pays its final coupon plus the principal.
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