Coupon (bond)


Coupon (bond)
Uncut bond coupons on 1922 Mecca Temple (NY, NY, U.S.A.) construction bond

A coupon payment on a bond is a periodic interest payment that the bondholder receives during the time between when the bond is issued and when it matures. Coupons are normally described in terms of the coupon rate, which is calculated by adding the total amount of coupons paid per year and dividing by the bond's face value. For example, if a coupon has a face value of $1000 and a coupon rate of 5%, then it pays total coupons of $50 per year. For the typical bond, this will consist of two semi-annual payments of $25 each.[1]

Overview

The origin of the term "coupon" is that bonds were historically issued in the form of bearer certificates. Physical possession of the certificate was proof of ownership. Several coupons, one for each scheduled interest payment over the life of the bond, were printed on the certificate. At the date the coupon was due, the owner would detach the coupon and present it for payment (an act called "clipping the coupon").[2]

Not all bonds have coupons. Zero-coupon bonds are those that pay no coupons and thus have a coupon rate of 0%. Such bonds make only one payment: the payment of the face value on the maturity date. To compensate the bondholder for the time value of money, the price of a zero-coupon bond will always be less than its face value on any date before the maturity date. The difference between the price and the face value provides the bondholder with the positive return that makes purchasing the bond worthwhile.

Between a bond's issue date and its maturity date (also called its redemption date), the bond's price is determined by taking into account several factors, including:

  • The face value;
  • The maturity date;
  • The coupon rate and frequency of coupon payments;
  • The creditworthiness of the issuer; and
  • The yield on comparable investment options.

See also

References


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Look at other dictionaries:

  • coupon bond — see bond 2 Merriam Webster’s Dictionary of Law. Merriam Webster. 1996. coupon bond n. A bond tha …   Law dictionary

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  • coupon bond — A bond in which the interest payable separately from the principal is represented by detachable coupons. Amey v Allegheny City (US) 24 How 364, 16 L Ed 614; Tennessee Bond Cases, 114 US 663, 29 L Ed 281, 5 S Ct 1098. See coupon …   Ballentine's law dictionary

  • coupon bond — noun a bond issued with detachable coupons that must be presented to the issuer for interest payments • Syn: ↑bearer bond • Hypernyms: ↑bond, ↑bond certificate …   Useful english dictionary

  • coupon bond — a bond, usually a bearer bond, that pays interest by means of coupons with specific cash values. [1860 65, Amer.] * * * …   Universalium

  • Coupon Bond — A debt obligation with coupons attached that represent semiannual interest payments. Also known as a bearer bond . No record of the purchaser is kept by the issuer, and the purchaser s name is not printed on the certificate …   Investment dictionary

  • coupon bond — A bond featuring coupons that must be presented to the issuer in order to receive interest payments. Bloomberg Financial Dictionary …   Financial and business terms

  • Zero-coupon bond — Financial markets Public market Exchange Securities Bond market Fixed income Corporate bond Government bond Municipal bond …   Wikipedia

  • zero coupon bond — A type of debt security that does not pay periodic interest. Zero coupon securities are bought and sold at prices that are less than the par value of the securities. The discount, or difference between the principal paid to purchase the security… …   Financial and business terms

  • registered coupon bond — registered (coupon) bond n. A long term, interest bearing instrument, in the form of a certificate, issued to the public by a corporate or governmental entity as a way to borrow money and registered on the books of the issuer. The obligor… …   Law dictionary


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