A coupon payment on a bond

Bond (finance)

In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...

 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.

Overview

The origin of the term "coupon" is that bonds were historically issued in the form of bearer certificates

Bearer bond

A bearer bond is a debt security issued by a business entity, such as a corporation, or by a government. It differs from the more common types of investment securities in that it is unregistered – no records are kept of the owner, or the transactions involving ownership. Whoever physically...

. 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").

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
  Yield (finance)
  In finance, the term yield describes the amount in cash that returns to the owners of a security. Normally it does not include the price variations, at the difference of the total return...
  
   on comparable investment options.

See also

• Credit (finance)
  Credit (finance)
  Credit is the trust which allows one party to provide resources to another party where that second party does not reimburse the first party immediately , but instead arranges either to repay or return those resources at a later date. The resources provided may be financial Credit is the trust...
  
  
• Yield curve spread
  Yield curve spread
  - In Economics :* Yield curve - The spread between long-term and short-term Treasuries* Z-spread - Also known as yield-spread curve, the flat spread over the treasury yield curve- In Materials Science :...
  
  
• TED spread
  TED spread
  The TED spread is the difference between the interest rates on interbank loans and on short-term U.S. government debt . TED is an acronym formed from T-Bill and ED, the ticker symbol for the Eurodollar futures contract....
  
  
• Credit spread (options)
  Credit spread (options)
  In finance, a credit spread, or net credit spread, involves a purchase of one option and a sale of another option in the same class and expiration but different strike prices. Investors receive a net credit for entering the position, and want the spreads to narrow or expire for profit...