What does the coupon rate of a bond represent?

The coupon rate of a bond represents the interest rate that the bond issuer agrees to pay bondholders, calculated as a percentage of the bond's face or par value. It is established at the time of issuance and is a critical factor for investors because it determines the periodic interest payments they will receive throughout the life of the bond. This rate is fixed and does not change over the duration of the bond.

Understanding the distinction between the coupon rate and other concepts is essential. For instance, the market interest rate at issuance is relevant but refers to the prevailing rates in the marketplace that influence bond pricing, not the rate set for the bond itself. The effective yield of the bond refers to the total return an investor can expect, taking into account factors such as market price changes and time to maturity, which can differ from the coupon rate, especially if the bond is traded in the secondary market. Lastly, the principal repayment amount refers to the bond's face value that is repaid to the bondholder at maturity, but it does not pertain to the interest payments represented by the coupon rate.

Thus, the correct answer effectively highlights that the coupon rate is the fixed interest rate specified at the bond's issuance that dictates the cash flow bondholders will receive.