Coupon Rates in Green Bonds – Why It’s Called "Coupon"

 Why it's called a "Coupon" instead of "Interest" or "Return"



Coupon Rates: 1

Why it's called a "Coupon" instead of "Interest" or "Return" 1

1. Historical Reason – Physical Bond Certificates 1

2. Technical Usage in Finance 2

Example (Green Bond Context) 2

In Summary: 2

1. Definition of Coupon Rate in Green Bonds 3

2. How Coupon Rates Are Determined 3

3. Examples in India 3

4. Special Features 4

5. Greenium Effect 4

Conclusion 4

Coupon Rates:

Coupon rates in Green Bonds refer to the periodic interest payments made to investors by the issuer, just like in traditional bonds. However, in the context of Green Bonds, coupon rates carry some unique considerations:

Why it's called a "Coupon" instead of "Interest" or "Return"

The term "coupon" has a historical origin and is still used in the bond market for very specific reasons:

1. Historical Reason – Physical Bond Certificates

  • In the past, bonds were physical paper certificates.

  • These certificates had detachable “coupons”—small slips for each interest payment.

  • Bondholders would literally clip the coupon and submit it to a bank or issuer to receive their interest.

Hence, the interest payment became known as the "coupon payment."

2. Technical Usage in Finance

  • Coupon: Refers specifically to the annual interest payment based on the face/par value of a bond.

    • E.g., A ₹1,000 bond with a 7% coupon pays ₹70 per year.

  • Interest: A general term that includes what borrowers pay lenders. It's used broadly for loans, savings accounts, etc.

  • Return: A broader financial term that includes interest, capital gains, reinvestment income, etc.

So:

  • Coupon = Fixed periodic payment

  • Interest = General concept

  • Return = Total earnings (coupon + capital gain/loss)

Example (Green Bond Context)

  • A ₹10 crore green bond issued by a corporation with a 6.75% coupon rate means:

    • It pays ₹67.5 lakhs per year in coupon (interest) to bondholders.

    • This is called the coupon, not "interest," to distinguish it from other forms of return or cost of borrowing.

In Summary:

Term

Meaning

Use In Bond Market

Coupon

Fixed periodic payment to bondholders

✅ Most precise

Interest

General payment for use of money

Too broad

Return

Total gain (coupon + capital gain/loss, etc.)

Broader investment term



1. Definition of Coupon Rate in Green Bonds

  • Coupon Rate = Annual interest rate paid on the bond's face value.

  • It is typically fixed (e.g., 6.5% per annum), but can sometimes be floating (e.g., SOFR + 120 bps).

2. How Coupon Rates Are Determined

Green bond coupon rates depend on:

  • Issuer’s credit rating (e.g., sovereign, corporate, municipal).

  • Market interest rate and benchmark yields (e.g., government securities).

  • Greenium: Some green bonds are issued at a slightly lower yield than regular bonds due to investor demand.

  • Currency: Domestic (₹) vs. International ($, €, ¥) impacts interest expectations.

3. Examples in India

  • IREDA Green Bond (USD-denominated): Issued at SOFR + 120 bps.

  • SBI Green Bond (Domestic): Fixed rate coupon, generally around 6.2% to 7.5%, depending on market conditions at the time.

  • Indore Municipal Corporation Green Bond (2023): 8.25% coupon rate.

  • NHPC Green Bond (2023): Coupon of around 7.5%, rated AAA.

4. Special Features

  • In some sustainability-linked bonds, coupon rates may be step-up/step-down, i.e., they can increase or decrease if environmental targets are not met.

5. Greenium Effect

  • "Greenium" = Green + Premium
     It means investors may accept a lower coupon (yield) on green bonds compared to non-green bonds due to ESG preferences.

Conclusion

While green bonds function similarly to traditional bonds in terms of coupon structure, the growing interest in sustainable investing can lead to slightly lower coupon rates (due to "greenium") or performance-linked coupons that reflect environmental outcomes. These bonds are increasingly attractive for ESG-conscious investors.

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