What Is a Coupon Bond?
A coupon bond, also referred to as a bearer bond or bond coupon, is a debt obligation with coupons attached that represent semiannual interest payments. With coupon bonds, there are no records of the purchaser kept by the issuer; the purchaser's name is also not printed on any kind of certificate. Bondholders receive these coupons during the period between the issuance of the bond and the maturity of the bond.
Key Takeaways
- A coupon bond is a bond that is essentially anonymous, with no name on the bond or sale record. The bond represents semi-annual interest payments.
- Coupon bonds are increasingly rare since the advent of electronic payments.
- Although coupon bonds—which are sometimes called bearer bonds—are rare, they offer a simple way for an investor to collect on earned interest.
How a Coupon Bond Works
Coupon bonds are rare since most modern bonds are not issued in certificate or coupon form. Instead, bonds are formed electronically, though some holders still prefer to own paper certificates. For this reason, the coupon bond simply refers to the rate it projects rather than its physical nature in the form of certificates or coupons.
Typical bonds consist of semi-annual payments costing $25 per coupon. Coupons are usually described according to the coupon rate. The yield the coupon bond pays on the date of its issuance is called the coupon rate. The value of the coupon rate may change. Bonds with higher coupon rates are more attractive for investors since they provide higher yields. The coupon rate is calculated by taking the sum of all the coupons paid per year and dividing it with the bond's face value.
Real-World Example of a Coupon Bond
If an investor purchases a $1,000 ABC Company coupon bond and the coupon rate is 5%, the issuer provides the investor with a 5% interest every year. This means the investor gets $50, the face value of the bond derived from multiplying $1,000 by 0.05, every year.
For the investor to claim his interest on the bond, he simply takes the corresponding coupon from the provided bond certificate and gives it to an agent of the issuing institution.
Special Consideration: Unregistered Bonds
Coupon bonds are usually bearer bonds. Anyone who provides the necessary coupons to the issuer can receive the interest payment regardless of whether that person is the actual owner of the bond. For this reason, coupon bonds present a lot of opportunities for tax evasion and other fraudulent acts.
Modern bonds are typically registered bonds with physical certificates that provide the terms of the debt and the name of the registered holder who receives interest payments automatically from the issuing institution. Some bonds are in the form of book-entry bonds, which are electronically registered and linked to the issuer and its investors. In book-entry bonds, the investor gets receipts instead of certificates. Investors also get accounts handled by financial institutions. They are able to receive their interest payments through these accounts.
FAQs
What is a Coupon Bond? A coupon bond is a type of bond that includes attached coupons and pays periodic (typically annual or semi-annual) interest payments during its lifetime and its par value at maturity. These bonds come with a coupon rate, which refers to the bond's yield at the date of issuance.
What is an example of a coupon bond? ›
Real-World Example of a Coupon Bond
If an investor purchases a $1,000 ABC Company coupon bond and the coupon rate is 5%, the issuer provides the investor with a 5% interest every year. This means the investor gets $50, the face value of the bond derived from multiplying $1,000 by 0.05, every year.
How does a bond coupon work? ›
A coupon payment refers to the annual interest paid on a bond. Coupons are expressed as s a percentage of the face value and are paid from the issue date until maturity. The coupon rate is determined by adding the sum of all coupons paid per year, then dividing that total by the face value of the bond.
What is a coupon and how is it used? ›
: a small piece of paper that allows one to get a service or product for free or at a lower price: such as. a. : one of a series of attached tickets or certificates often to be detached and presented as needed. b. : a ticket or form authorizing purchases of rationed commodities.
How do bonds work example? ›
For example, a $10,000 bond with a 10-year maturity date and a coupon rate of 5% would pay $500 a year for a decade, after which the original $10,000 face value of the bond is paid back to the investor. Like any investment, bonds have pros and cons.
What is an example of a bond discount? ›
The bond discount is the difference by which a bond's market price is lower than its face value. For example, a bond with a par value of $1,000 that is trading at $980 has a bond discount of $20.
Are coupon bonds risky? ›
The main risk associated with coupon bonds is that the issuer might default or go bankrupt before they are able to pay you your full principal amount on the bond's maturity date. This will leave investors who have not sold their coupons prior to this event at a loss of some or all of their money.
How often is a bond coupon paid? ›
That active payment occurs on a fixed basis, usually twice a year. Historically, when investors purchased a bond they would receive a sheet of paper coupons. The investor would return these coupons on a regular basis and receive their payment in exchange. Today most issuers make payments electronically.
How does a coupon work on treasury bills? ›
U.S. Treasury Bills (T-Bills) are great examples of “low coupon” bonds—in fact, T-Bills have no coupon at all! However, this does not prevent them from providing income and positive return on investment. T-Bills are bought at a discount to par and then pay out full par value at maturity.
What is the coupon rate of a $1000 bond that pays a $60 coupon payment? ›
The par value is simply the face value of the bond or the value of the bond as stated by the issuing entity. Thus, a $1,000 bond with a coupon rate of 6% pays $60 in interest annually and a $2,000 bond with a coupon rate of 6% pays $120 in interest annually.
Businesses use coupons to attract new customers, retain existing ones, and promote specific products or services. On the other hand, consumers benefit from coupons by getting a reduced price on their purchases, allowing them to save money or afford items they might not have otherwise considered.
Where are coupons used? ›
Customarily, coupons are issued by manufacturers of consumer packaged goods or by retailers, to be used in retail stores as a part of sales promotions.
How are bonds used in real life? ›
Individuals and institutions can use bonds for long-term planning, preserving principal, saving, maximizing income, managing interest-rate risk, and diversifying portfolios. Bonds provide a predictable stream of coupon income and their full par value if held to maturity.
How do bonds work for kids? ›
You are lending your money to a company, or it can be a government, and they pay you back with interest after a period of time. The company who wants the loan will set how long they want the loan for. This is known as the 'term' of a bond, it could be months or many years. In our Subway example, the term was 5 years.
What is bonds and its example? ›
Bonds are investment securities where an investor lends money to a company or a government for a set period of time, in exchange for regular interest payments. Once the bond reaches maturity, the bond issuer returns the investor's money.
What are the types of coupon bond? ›
Key Learning Points
- There are several bond coupon types – fixed and floating rate bonds, and there is a special type of fixed-rate bond – a zero-coupon bond.
- Unlike a fixed rate bond, in a floating rate bond, the next coupon can be higher or lower than the previous coupon.
Interest payment: U.S. savings bonds are zero-coupon bonds that do not pay interest until they are redeemed or until the maturity date. The interest compounds semi-annually and accrues every year for 30 years.
What is an example of a zero-coupon bond? ›
For example, a zero-coupon bond with a face value of Rs. 20,000 that matures in 20 years with an interest rate of 5.5% might sell for around Rs. 7,000. At maturity, two decades later, the investor will receive a lump-sum payment of Rs.
How do you find the coupon bond? ›
If you know the face value of the bond and its coupon rate, you can calculate the annual coupon payment by multiplying the coupon rate times the bond's face value. For example, if the coupon rate is 8% and the bond's face value is $1,000, then the annual coupon payment is . 08 * 1000 or $80.
