What does the term "coupon" refer to in bond investing?

In the context of bond investing, the term "coupon" specifically refers to the rate of interest that a bond issuer pays to bondholders, usually expressed as a percentage of the bond's face value. This interest payment is typically made at regular intervals, such as annually or semi-annually. The coupon is a key component of the bond's overall return and is critical for investors to understand when evaluating the yield and income potential of a bond.

While the "rate of return on the bond" might seem similar to the definition of coupon, it actually encompasses a broader concept that includes not only the coupon payments but also any capital gains or losses incurred if the bond is sold before maturity. Thus, while the rate of return can vary based on market conditions, the coupon is a predetermined figure that represents the specific income generated by the bond from interest payments. This distinction is essential for understanding bond investments.