Coupon (bond)
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The coupon or coupon rate of a bond is the amount of interest paid per year expressed as a percentage of the face value of the bond. It is the interest rate that a bond issuer will pay to a bondholder.[1]
[edit] Overview
For example if you hold $10,000 nominal of a bond described as a 4.5% loan stock, you will receive $450 in interest each year (probably in two installments of $225 each).
Not all bonds have coupons. Zero-coupon bonds are those which do not pay interest, but are sold at the initial offering to investors at a price less than the par value. When held to maturity, the bond is redeemed for par value.
The origin of the expression "coupon" is that bonds were historically issued as bearer certificates, so that possession of the certificate was conclusive proof of ownership. Several coupons, one for each scheduled interest payment covering a number of years, were printed on the certificate. At the due date the owner would physically detach the coupon and present it for payment of the interest (known as "clipping the coupon").[2]
Between the issue date and the redemption date, the price of a bond will be determined by the market, taking into account among other things:
- The amount and date of the redemption payment at maturity;
- The amounts and dates of the coupons;
- The ability of the issuer to pay interest and repay the principal at maturity;
- The yield offered by other similar bonds in the market.
[edit] References
- ^ Sullivan, Arthur; Steven M. Sheffrin (2003). Economics: Principles in action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. pp. 277. ISBN 0-13-063085-3. http://www.pearsonschool.com/index.cfm?locator=PSZ3R9&PMDbSiteId=2781&PMDbSolutionId=6724&PMDbCategoryId=&PMDbProgramId=12881&level=4.
- ^ Belson, Ken (2006-02-12). "Coupon clipping, the old fashioned way". New York Times. http://www.nytimes.com/2006/02/12/business/yourmoney/12bearer.html?_r=1&scp=1&sq=Coupon%20Clipping,%20the%20Old-Fashioned%20Way&st=cse. Retrieved on 2009-03-03.
[edit] External links
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