In
finance
Finance refers to monetary resources and to the study and Academic discipline, discipline of money, currency, assets and Liability (financial accounting), liabilities. As a subject of study, is a field of Business administration, Business Admin ...
, a coupon is the
interest
In finance and economics, interest is payment from a debtor or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distinct f ...
payment received by a bondholder from the date of issuance until the date of
maturity of a
bond.
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. 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.
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").
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.
Zero-coupon bonds
Not all bonds have coupons.
Zero-coupon bond
A zero-coupon bond (also discount bond or deep discount 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 zer ...
s 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. Normally, to compensate the bondholder for the
time value of money
The time value of money refers to the fact that there is normally a greater benefit to receiving a sum of money now rather than an identical sum later. It may be seen as an implication of the later-developed concept of time preference.
The time ...
, the price of a zero-coupon bond will always be less than its face value on any date of purchase before the maturity date. 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.
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:
* The
face value;
* The
maturity date;
* The coupon rate, frequency of coupon payments, and
day count convention;
* The creditworthiness of the issuer; and
* The
yield on comparable
investment
Investment is traditionally defined as the "commitment of resources into something expected to gain value over time". If an investment involves money, then it can be defined as a "commitment of money to receive more money later". From a broade ...
options.
See also
*
Credit (finance)
Credit (from Latin verb ''credit'', meaning "one believes") is the trust which allows one party to provide money or resources to another party wherein the second party does not reimburse the first party immediately (thereby generating a deb ...
*
Credit spread (options)
*
TED spread
*
Yield curve
In finance, the yield curve is a graph which depicts how the Yield to maturity, yields on debt instruments – such as bonds – vary as a function of their years remaining to Maturity (finance), maturity. Typically, the graph's horizontal ...
References
{{Authority control
Bond valuation
io:Kupono