Coupon (finance)

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

In finance, a coupon is the interest payment received by a bondholder from the date of issuance until the date of maturity of a bond. [1]

Contents

Coupons are normally described in terms of the "coupon rate", which is calculated by adding the sum of coupons paid per year and dividing it by the bond's face value. [2] For example, if a bond has a face value of $1,000 and a coupon rate of 5%, then it pays total coupons of $50 per year. Typically, this will consist of two semi-annual payments of $25 each. [3]

1945 2.5% $500 Treasury Bond coupon 1945 2.5%25 $500 Treasury Bond coupon.jpg
1945 2.5% $500 Treasury Bond coupon

History

The origin of the term "coupon" is that bonds were historically issued in the form of bearer certificates. Physical possession of the certificate was (deemed) proof of ownership. Several coupons, one for each scheduled interest payment, 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"). [4]

The certificate often also contained a document called a talon, which (when the original block of coupons had been used up) could be detached and presented in exchange for a block of further coupons. [5]

Zero-coupon bonds

Not all bonds have coupons. Zero-coupon bonds are those that pay no coupons and thus have a coupon rate of 0%. [6] [7] [8] Such bonds make only one payment: the payment of the face value on the maturity date. Normally, 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 of purchase before the maturity date. [9] During the European sovereign-debt crisis, some zero-coupon sovereign bonds traded above their face value as investors were willing to pay a premium for the perceived safe-haven status these investments hold [10] . The difference between the price and the face value provides the bondholder with the positive return that makes purchasing the bond worthwhile.

Valuation

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:

See also

Related Research Articles

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A zero-coupon bond is a bond in which the face value is repaid at the time of maturity. Unlike regular bonds, it does not make periodic interest payments or have so-called coupons, hence the term zero-coupon bond. When the bond reaches maturity, its investor receives its par value. Examples of zero-coupon bonds include US Treasury bills, US savings bonds, long-term zero-coupon bonds, and any type of coupon bond that has been stripped of its coupons. Zero coupon and deep discount bonds are terms that are used interchangeably.

<span class="mw-page-title-main">Government bond</span> Bond issued by a government

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In finance, the clean price is the price of a bond excluding any interest accrued since bond's issuance and the most recent coupon payment. Comparatively, the dirty price is the price of a bond including the accrued interest. Therefore,

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References

  1. ↑ "What Is a Bond Coupon, and How Is It Calculated?". Investopedia. Retrieved 2024-08-14.
  2. ↑ Tammas-Hastings, Dan (2021-03-03). Liability-Driven Investment: From Analogue to Digital, Pensions to Robo-Advice. John Wiley & Sons. p. 80. ISBN   978-1-119-44196-0.
  3. ↑ O'Sullivan, Arthur; Sheffrin, Steven M. (2003). Economics: Principles in Action . Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. pp.  277. ISBN   0-13-063085-3.{{cite book}}: CS1 maint: location (link)
  4. ↑ Belson, Ken (2006-02-12). "Coupon Clipping, the Old-Fashioned Way". New York Times. Archived from the original on 2013-12-19. Retrieved 2009-03-03.
  5. ↑ "Talon Definition from Financial Times Lexicon". Archived from the original on 2017-12-15. Retrieved 2017-12-14.
  6. ↑ "Coupon Bond Vs. Zero Coupon Bond: What's the Difference?". Investopedia. Retrieved 2024-08-14.
  7. ↑ During, Alexander (2021-03-22). Fixed Income Trading and Risk Management: The Complete Guide. John Wiley & Sons. p. 140. ISBN   978-1-119-75633-0.
  8. ↑ "X3 Coupons" . Retrieved 2024-08-14.
  9. ↑ "Bond Valuation: Calculation, Definition, Formula, and Example". Investopedia. Retrieved 2024-08-14.
  10. ↑ "Information Spillovers and Sovereign Debt:Theory Meets the Eurozone Crisis" (PDF). European Central Bank. Retrieved 2024-08-14.
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