In addition to receiving the principal on expiry, holders of a debt security, in general, can receive an interest income at a rate higher than a general deposit rate. The coupon rate of a debt security is the stated annual rate of interest that the issuer pays on the principal to the holder of the debt security. Coupon rates can be divided into three main categories:
- Fixed rate: a fixed rate of interest over the life of the debt security.
- Floating rate: the interest rate is adjusted periodically according to a predetermined benchmark.
- Zero-coupon: there are no periodic interest payments, but the debt security is usually issued at a discount to its par value. On maturity, investors receive a payment comprising principal and interest.