Between the issuance and maturity of a bond, the issuer makes regular interest payments, also known as coupon payments to the bond holder.

The vast majority of bonds issued are known as fixed coupon bonds.

This simply means that the coupon rates is set at bond issuance and remains unchanged over the life of the bond.

Let's take an example. Consider a 10 year 3% fixed coupon bond that pays interest annually.

This means that each year the bond holder will receive 3% of the bonds face value as an interest payment.

Importantly, these payments are predictable.

The bond holder knows exactly when and how much will be received every year, assuming the issuer does not default.

So the bond holder receives a 3% coupon payment each year for the entire 10 year period.

At the end of the 10 years, the bond holder not only receives the final 3% interest payment, but also gets back the principal amount invested in the bond as well.

But what determines the coupon rates? The coupon rate reflects the general interest rate level and the perceived credit worthiness of the issuer at the time of issuance.

Once set, it remains fixed.

In this example, no matter what happens to interest rates in the wider market, the 3% coupon stays the same over the bonds 10 year term.