What is the coupon rate's main function in finance?

The coupon rate serves a fundamental role in determining the amount of interest payments that a bondholder will receive over the life of the bond. It is expressed as a percentage of the bond's face (or par) value and dictates the periodic interest payments that the issuer is obligated to make to the bondholder.

For example, if a bond has a face value of $1,000 and a coupon rate of 5%, the bondholder would receive $50 each year until the bond matures. This clear connection between the coupon rate and the cash flow generated for investors is essential for assessing the bond's attractiveness and potential return.

Understanding the coupon rate is critical for investors as it directly impacts their income stream from bond investments, which is a key consideration when evaluating fixed-income securities.