Definition
A coupon in the context of finance and accounting refers to:
1. Dated Slip Attached to a Bond
A coupon is one of several dated slips attached to a bond certificate. These slips must be presented to the issuing company’s agent to obtain the bond’s interest payment or dividend. Historically, this was common with bearer securities where the holder of the physical document had the right to receive the bond’s payments.
2. Rate of Interest
The term coupon also denotes the stated interest rate paid by a fixed-interest bond. This interest rate is usually expressed as an annual percentage of the bond’s par value.
3. General Term in US Treasury Markets
In the context of US Treasury markets, “coupon” is a general name used for bonds and notes, which pay interest periodically.
Examples
Example 1: Bearer Securities
John holds a bearer bond with attached coupons. Every six months, he presents a coupon to the bond issuer’s agent to receive the interest payment due for that period.
Example 2: Fixed-Interest Bond
A $1,000 bond with a 5% annual coupon rate will pay $50 in interest per year, typically in semiannual installments.
Example 3: US Treasury Bonds
When discussing coupon in financial circles, it is often used to refer to the regular interest payments made by standard US Treasury bonds and notes.
Frequently Asked Questions
What is a coupon rate?
The coupon rate is the annual interest rate paid on a bond, expressed as a percentage of the face value (par value) of the bond.
How often do bond coupons pay interest?
Most bond coupons pay interest semiannually, though the frequency can differ based on the bond’s terms.
What is a bearer security?
A bearer security is a type of fixed-income security that is not registered in the name of the owner and is payable to whoever holds it (the bearer).
Can coupon bonds be traded?
Yes, coupon bonds can be traded in the secondary market. The trader receives the right to future interest payments and the return of principal at maturity.
How is the coupon rate different from the yield?
The coupon rate is the annual interest rate paid by a bond’s issuer, while the yield refers to the return on investment, considering the bond’s current market price.
Related Terms
Bearer Security
A type of security that is not registered in the name of the owner and is payable to whoever holds it.
Bond
A fixed-income instrument representing a loan made by an investor to a borrower, typically corporate or governmental.
Dividend
A payment made by a corporation to its shareholders, usually as a distribution of profits.
Interest Rate
The amount charged by a lender to a borrower for the use of assets, expressed as a percentage of the principal.
Par Value
The face value of a bond or the stock value stated in the corporate charter.
Online References
- Investopedia - Coupon Rate
- SEC.gov - Investor Bulletin: Corporate Bonds
- Investing in Bonds - Understanding Bond Yields
Suggested Books for Further Study
- “The Bond Book: Everything Investors Need to Know About Treasuries, Municipals, GNMAs, Corporates, Zeros, Bond Funds, Money Market Funds, and More” by Annette Thau
- “Bonds: The Unbeaten Path to Secure Investment Growth” by Hildy Richelson and Stan Richelson
- “Investments” by Zvi Bodie, Alex Kane, and Alan J. Marcus
Accounting Basics: “Coupon” Fundamentals Quiz
Thank you for exploring our comprehensive definition of a coupon in the context of bonds, along with our insightful quiz questions. Enhancing your financial literacy is vital in mastering the complexities of investment instruments.