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A bond’s corporate coupon is the interest income paid to a bond holder annually or semi-annually by the issuing company. Basically, the coupon rate is the interest rate offered to a bond holder. Suppose you have invested $1000 on a corporate bond and your coupon rate is 6%, your interest income will be $60 per year. The corporate bond interest is termed as a corporate coupon because some of the bonds have coupons attached. Bond holders strip off the coupons attached to their bonds and redeem them. Since most accounts are handled electronically, this practice has become less common.[br]
Corporate Coupon and Interest Rates
It is useful to understand the basics of interest rates and corporate coupon rates before investing in these debt instruments. The Fed or the Federal Reserve fixes interest rates in the US. They will change the interest rates based on the economy’s health in general and the inflation rates in particular. The US Fed will increase the interest rates if inflation increases. When the interest rate increases, the money supply decreases and so will the inflation rate. If the whole economy is slowing down or there is a deflationary pressure, the US Fed will reduce the interest rate just to increase the money supply.[br]
Corporate Coupon and Prevailing Interest Rates
Think about the interest rate phenomenon and make an attempt to understand it thoroughly while you are investing in bond markets. This is because the yield from any bond including corporate bond is directly related to the prevailing interest rates. The price of corporate bonds will decrease if the interest rate increases and vice versa. If you do not want to sell your bonds before the maturity period, there is nothing to worry about the corporate coupon rate.
However, if you are investing in bonds for short-term purposes, you should be very careful about the prevailing interest rates and what direction it will go as time goes by. Suppose you are selling your bonds in a situation where interest rates are rising, you will incur loss. When interest rate rises, the bond prices decrease.
Although the corporate coupon rate is higher than the US treasury coupon, the risks associated with the corporate bonds is higher as you will lose the money if the company goes out of business. The US treasury bonds are guaranteed by the Federal government so you can be rest assured that you will not lose a single penny.