What is a bond's coupon rate?

A bond's coupon rate is defined as the interest rate that the bond issuer pays to investors. This rate is typically expressed as a percentage of the bond's face value and represents the annual interest payments that bondholders will receive during the life of the bond. For example, if a bond has a face value of $1,000 and a coupon rate of 5%, the bondholder would receive $50 per year in interest payments.

The coupon rate is fixed at issuance and impacts the bond's attractiveness to investors. When market interest rates fluctuate, the bond’s market value can vary, but the coupon payments remain the same. This makes it critical for investors to understand the coupon rate, as it directly affects the income generated from the investment.

In contrast, other options describe different aspects of bonds. The yield impacts how bonds trade in the market based on supply and demand, but it is not the same as the coupon rate. Inflation rate considerations can influence bond investment decisions, but they do not define the coupon rate itself. Lastly, the bond's initial issuance price is associated with how the bond is sold, which is separate from the coupon rate that determines the interest payments over the life of the bond.