Coupon rates and Coupon Rate calculations are most often used when referring to the annual dividend of a fixed-rate security. The Coupon Rate itself rarely changes. The variable in the investment is the value of the security or bond. This rate is calculated by comparing the security’s face value with the rate of return.
As an example, a $5,000 issue that yields $50 annually has a coupon rate of 1%. Changes in Coupon Rates happen with a change in the value of a security. Values and returns change, but coupon rates are generally consistent. Securities and bonds operation on a Coupon Rate are often considered low-risk because they are centered on a fixed investment amount. Fluctuations occur with industry-wide and regulatory adjustments, but the investment amount remains intact and active. In special cases, Coupon Rates are adjusted for securities amounts that are reduced by the investor or rolled-over into other investment vehicles.
The term “Coupon Rate” was adopted because of the nature of certain securities to produce returns in a mutually-beneficial, multiparty financial investment system. A Coupon Rate of return is a contractual agreement between investors, brokers, and financiers. This type of security exercises a “portion redemption” method of investment strategy.