What is a coupon?
The coupon is the interest rate which the issuer pays to the security holders. Usually this rate is fixed throughout the life of the security. Hence bonds are often called fixed income instruments. The coupon can also be fixed relative to a varying money market index, such as LIBOR. Many bank sub-ordinated bonds, preferenace shares and PIBs have a reset rate. This is the interest rate or coupon paid on the security after a call date if the issuer does not exerice its option to call (or redeem) the security on that date.
The interest rate is affected by many factors, including current market interest rates, the length of the term and the credit worthiness of the issuer.
The name coupon originates from when physical bonds were issued which had coupons attached to them. On coupon dates, the bond holder would give the coupon to a bank in exchange for the interest payment.