This might be a very basic question but I genuinely cannot find a clear answer. When I read about bonds some articles say coupon rate and others say interest rate. My bank FD gives interest. My bond gives coupons. Are these the same thing? If so why two different words? And if not what is the actual difference?
Completely understandable confusion. The terms overlap but come from different contexts. Interest is the broad concept of compensation paid to a lender for the use of their money. Coupon is the specific term for the fixed periodic payment on a bond, and it comes from the physical history of bonds. In the era before electronic records, bonds were printed certificates with detachable coupons along the edge. When an interest payment was due the bondholder would literally clip that coupon and present it to receive payment. That physical coupon gave rise to the term.
wait so coupon literally used to be a piece of paper you cut off a bond certificate. that is wild. and now it just means the interest payment?
Exactly. The physical coupon is long gone but the terminology stuck. In modern usage coupon rate and interest rate mean the same thing when talking about bonds. The coupon rate is the annual interest rate the bond pays expressed as a percentage of the face value. A bond with a face value of Rs 10,000 and a coupon rate of 9% pays Rs 900 per year, typically in two instalments of Rs 450 each for semi-annual bonds.
is there any situation where coupon and interest are genuinely different for the same bond
For a zero coupon bond, yes. A zero coupon bond pays no periodic interest at all. It is issued at a discount and matures at face value. The investor earns the difference between the purchase price and the face value. So the instrument technically has no coupon but the investor does earn interest in an economic sense. The interest accrues over time even though nothing is paid out periodically. The Income Tax Act treats this accrued but unpaid interest as taxable each year even without an actual cash receipt, which trips up many people.
so for regular bonds with periodic payments, coupon rate equals interest rate and they mean the same thing. only for zero coupon bonds does the distinction matter because there is economic interest without an actual coupon payment.