Bond interest payments are the cash an issuer sends you, usually twice a year, calculated as a fixed percentage of the bond’s face value. The percentage is set at issuance and, on a standard fixed-rate bond, never changes. What you actually keep depends on who issued the bond, because federal, state, and local tax treatment all turn on that single fact.
How the Coupon Turns Into Dollars
The coupon rate is the annual interest percentage the issuer promises, applied to face value (par). A $1,000 bond with a 5% coupon generates $50 a year. A $10,000 bond with a 4% coupon generates $400. Divide the annual figure by the number of payments per year to get each check: that $10,000 bond on the typical semi-annual schedule pays $200 every six months until maturity.
Federal tax rules treat interest received or credited to your account as gross income, whether it comes from a corporate bond, a savings account, a promissory note, or a mortgage.1eCFR. 26 CFR 1.61-7 – Interest
When Payments Arrive and Who Gets Them
Payment frequency is fixed at issuance. Most corporate and U.S. Treasury bonds pay semi-annually on set calendar dates. Some pay annually, quarterly, or monthly. To collect a payment you have to be the registered holder on the bond’s record date, which falls shortly before the payment date. If you sell after the record date but before the payment date, the payment still comes to you, and the buyer’s purchase price reflects that.
A missed payment doesn’t immediately mean default. Most corporate indentures include a 30-day grace period during which the issuer can cure. If the grace period runs out, the miss becomes a formal event of default, which can accelerate the entire principal balance and open the door to bondholder suits or restructuring. Specific grace periods and remedies vary by deal, so the indenture is the controlling document.
Bonds That Don’t Pay a Plain Fixed Coupon
Floating-Rate Notes
Floating-rate notes reset their interest rate periodically to a benchmark plus a fixed spread. Corporate floaters commonly reference the Secured Overnight Financing Rate. Treasury floating-rate notes tie their index rate to the highest accepted discount rate of the most recent 13-week Treasury bill auction, reset weekly, and pay quarterly.2TreasuryDirect. Floating Rate Notes
Step-Up Bonds
Step-up bonds start with a lower coupon that increases on scheduled dates. Issuers often pair the structure with a call feature, letting them redeem the bond before the higher rate kicks in if market rates have fallen.
Zero-Coupon Bonds
Zero-coupon bonds skip periodic payments entirely. You buy at a deep discount and receive par at maturity. A zero purchased for $600 that matures at $1,000 delivers $400 of interest, but it all arrives at the end. The tax treatment is not as friendly as the cash flow suggests; see the OID discussion below.
Callable Bonds
If an issuer calls a bond, you receive the specified call price plus any accrued interest through the redemption date, and coupon payments stop. If rates have dropped since you bought, you’re likely to face reinvestment at lower yields.
TIPS
Treasury Inflation-Protected Securities pay a fixed coupon rate on a principal that changes with the Consumer Price Index. Every six months the Treasury multiplies your original principal by a daily index ratio reflecting cumulative inflation, then applies half the annual coupon rate to that adjusted amount.3TreasuryDirect. TIPS/CPI Data Payments rise with inflation and fall with deflation, though at maturity you’re guaranteed at least the original par.
Buying Between Payment Dates
Bonds rarely trade on a coupon date. When you buy between dates, you pay the seller for the interest that built up while they held the bond. That is accrued interest. When the next full coupon comes to you, the accrued interest you paid at purchase can be subtracted from your taxable interest income on Schedule B.4Internal Revenue Service. Instructions for Schedule B (Form 1040) – Section: Part I. Interest
Two day-count conventions do the counting. The 30/360 method treats every month as 30 days and every year as 360; it is standard for corporate and municipal bonds. The actual/actual method counts real calendar days and is used for U.S. Treasury securities.
Federal Tax by Issuer
Who issued the bond drives almost everything about how the interest is taxed.
Corporate Bonds
Interest is taxable as ordinary income at the federal level. For 2026, federal income tax rates run from 10% to 37%.5Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 The paying institution issues Form 1099-INT if you received $10 or more in interest during the year.6Internal Revenue Service. About Form 1099-INT, Interest Income Smaller amounts are still taxable even if no 1099 arrives.
U.S. Treasury Securities
Treasury interest is federally taxable but exempt from state and local income tax. Federal law bars states from taxing obligations of the U.S. government, subject only to nondiscriminatory franchise taxes on corporations and estate or inheritance taxes.7Office of the Law Revision Counsel. 31 USC 3124 – Exemption From Taxation In a high-tax state, that exemption can meaningfully raise your after-tax yield versus a corporate bond paying the same coupon.
Municipal Bonds
Interest on bonds issued by state and local governments is generally excluded from federal gross income.8Office of the Law Revision Counsel. 26 USC 103 – Interest on State and Local Bonds If you live in the state that issued the bond, the interest is often exempt from that state’s income tax as well. Certain private-activity bonds, those financing facilities used by a private business, may not qualify for the federal exclusion and can also expose you to the Alternative Minimum Tax.
Extra Layers You May Owe
Net Investment Income Tax
Higher-income investors face an additional 3.8% tax on net investment income, which explicitly includes interest. The surtax kicks in when modified adjusted gross income exceeds $200,000 for single filers or $250,000 for married couples filing jointly.9Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax Those thresholds are not indexed to inflation. A bondholder in the 37% bracket who also owes the NIIT pays an effective 40.8% federal rate on corporate bond interest.
Original Issue Discount and Phantom Income
Zero-coupon bonds and other bonds issued below par produce Original Issue Discount, and the IRS doesn’t let you wait until maturity to report the interest. You owe tax on a share of the OID each year you hold the bond, even though no cash has arrived. Investors sometimes call this phantom income.
The annual amount is calculated using the constant yield method: multiply the bond’s adjusted issue price at the start of the accrual period by the yield to maturity, then divide by the number of accrual periods per year. That figure is taxable income for the period.10Internal Revenue Service. Publication 1212, Guide to Original Issue Discount (OID) Instruments Your brokerage should send Form 1099-OID; if it doesn’t, the reporting obligation is still yours.
Backup Withholding
If you don’t give the payer your taxpayer identification number, or the IRS notifies the payer that you’ve underreported, the payer withholds 24% of each interest payment and sends it to the IRS. You can claim credit for it on your return, but the interim cash-flow effect is real. Keeping a current W-9 on file with every institution that pays you interest is the simplest fix.
Savings Bonds: A Different Timing Rule
Series EE and Series I savings bonds handle timing differently from marketable bonds. You can defer reporting the interest until you redeem, the bond matures, or you transfer it, which is the default. You can instead elect to report the annual increase in value as income each year.11eCFR. 26 CFR 1.454-1 – Obligations Issued at Discount Once you elect annual reporting, you’re locked in for that bond and future years unless you get IRS permission to switch back.
There’s an education-related exclusion as well. If you cash Series EE or Series I bonds to pay qualified higher education expenses like tuition and fees, you may exclude some or all of the interest from federal income. The bond must have been issued after 1989, you must have been at least 24 when it was issued, and your modified adjusted gross income must fall below the annual phase-out. For 2025, phase-outs began at $99,500 for single filers and $149,250 for joint filers, with the exclusion disappearing entirely at $114,500 and $179,250. The 2026 thresholds are typically adjusted upward for inflation.
Amortizing a Premium to Reduce Taxable Interest
If you buy a bond for more than face value, the excess is a premium. Pay $1,050 for a $1,000 bond and you’ve paid a $50 premium. You can elect to amortize that premium over the bond’s remaining life, offsetting your taxable interest income each year by a share of it. The election applies to all taxable bonds you hold, not just one.12eCFR. 26 CFR 1.171-4 – Election to Amortize Bond Premium on Taxable Bonds
You make the election by offsetting interest income by the amortized premium on the return for the first year you want it to apply and attaching a statement. Revoking it later requires IRS approval. If you skip the election in early years and start later, you can’t go back to recapture the amortization you missed.
How the Money Actually Reaches You
Nearly all bonds now exist as electronic records rather than paper certificates. Treasury moved to a book-entry system, and corporate bonds followed through the Depository Trust Company.13eCFR. 31 CFR Part 357 – Regulations Governing Book-Entry Treasury Bonds, Notes and Bills When a payment comes due, a trustee or paying agent distributes the funds electronically. Treasury securities held through TreasuryDirect pay by direct deposit to the bank account on file. Bonds held through a brokerage pay into the brokerage account. Once your ownership is registered, the process runs on its own.