Explained

Coupon vs your contracted rate

One-liner

The coupon (the interest the bond pays you on a schedule) is one thing; the rate you when you bought is another.

Why it matters

A bond always pays what was set at issuance. Buy it at a discount and the coupon is lower than the rate you contracted; pay a premium and the coupon is higher. So if you bought cheap and were counting on the coupons to live on, you can come up short: what it pays is less than the rate that drew you in.

Analogy

An apartment's rent is good or bad depending on the price you paid for the place. In fixed income the rent (the coupon) is always the same, set at issuance. Paying more or less does not change the rent, it changes your return.

The catch

Even buying at a good rate, if you were counting on the coupon for income, the periodic payment will be smaller than you expected.

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