Definition
A coupon bond is a type of bond that includes a series of detachable coupons. These coupons must be presented to a paying agent or the issuer to receive semiannual interest payments. The person who holds the coupon is entitled to the interest, making coupon bonds bearer bonds. This characteristic allows interest payments to be collected anonymously.
Characteristics
- Bearer Instrument: Ownership is determined by possession.
- Detachable Coupons: Coupons must be presented for interest payment.
- Semiannual Interest Payment: Typically pays interest twice a year.
- Anonymity: Provides anonymity to the holder due to bearer form.
- Physical Certificates: Often exists in physical form due to coupon presentation requirement.
Examples
- U.S. Treasury Bonds (Historical): Previously, the U.S. Treasury issued coupon bonds but has now discontinued this practice in favor of book-entry systems.
- Corporate Bonds: Some corporations issued coupon bonds which could be redeemed by presenting physical coupons for interest payments.
- Municipal Bonds: Local governments issued coupon bonds to fund projects, whereby interest was collected via presented physical coupons.
Frequently Asked Questions (FAQs)
What is the difference between a coupon bond and a registered bond?
A coupon bond (bearer bond) has detachable coupons for interest payments, and the possession of the bond defines ownership. A registered bond, however, is registered in the owner’s name, and interest payments are made directly to the registered owner.
Is it still possible to purchase coupon bonds today?
Coupon bonds are not commonly issued today. Most bonds are now issued in book-entry format to enhance security and traceability.
How are interest payments collected on a coupon bond?
The bondholder must detach the coupon from the bond certificate and present it to the paying agent or issuer to collect the semiannual interest payment.
Why are coupon bonds considered less secure?
Since coupon bonds are bearer instruments, anyone who holds the coupon can redeem it, increasing the risk of loss or theft compared to registered bonds.
Can coupon bonds be sold in secondary markets?
Yes, coupon bonds can be sold in secondary markets. The price of the bond typically reflects the remaining coupons and principal payments.
Related Terms
- Bearer Bond: A bond that is not registered in the investor’s name and provides interest payments to whoever holds the physical certificate.
- Registered Bond: A bond registered in the name of the owner, with interest payments sent directly to the registered owner.
- Principal: The amount of money that is originally invested in the bond and that is paid back to the bondholder at maturity.
- Maturity Date: The date on which the principal amount of the bond is to be paid back to the bondholder.
- Interest Rate: The percentage of the principal which is paid as interest to the bondholder, usually expressed on an annual basis.
Online References
Suggested Books for Further Studies
- “The Bond Book” by Annette Thau
- “Fixed Income Analysis” by Frank J. Fabozzi
- “Bond Markets, Analysis and Strategies” by Frank J. Fabozzi
Fundamentals of Coupon Bonds: Finance Basics Quiz
### What is a coupon bond?
- [ ] A bond that pays interest only at maturity.
- [ ] A bond with interest based on coupon collection.
- [x] A bond issued with detachable coupons for semiannual interest payments.
- [ ] A bond registered in the holder’s name.
> **Explanation:** A coupon bond is a type of bond issued with detachable coupons that need to be presented to a paying agent or the issuer to receive semiannual interest payments.
### How are coupon bonds classified in terms of ownership?
- [x] Bearer bonds
- [ ] Registered bonds
- [ ] Convertible bonds
- [ ] Secured bonds
> **Explanation:** Coupon bonds are classified as bearer bonds because possession of the bond and its coupons determine ownership and entitlement to interest payments.
### How frequently are interest payments typically made for coupon bonds?
- [ ] Annually
- [x] Semiannually
- [ ] Quarterly
- [ ] Monthly
> **Explanation:** Interest payments on coupon bonds are typically made semiannually.
### Are coupon bonds still commonly issued today?
- [ ] Yes, they are the most common type of bond.
- [x] No, they are rarely issued today.
- [ ] Only by government entities.
- [ ] Only in the corporate sector.
> **Explanation:** Coupon bonds are rarely issued today, with most bonds now being issued in a book-entry format for enhanced security.
### What must a bondholder do to collect interest from a coupon bond?
- [ ] Fill out a tax form and submit it.
- [ ] Renew the bond certificate annually.
- [x] Detach and present the coupon to the paying agent.
- [ ] Register the bond in their name.
> **Explanation:** To collect interest, a bondholder must detach and present the coupon to the paying agent or issuer.
### What type of bond is registered in the owner's name, contrasting with coupon bonds?
- [x] Registered bonds
- [ ] Convertible bonds
- [ ] Floating rate bonds
- [ ] Hybrid bonds
> **Explanation:** Registered bonds are registered in the owner's name, unlike coupon bonds which are bearer bonds.
### What is one primary risk associated with coupon bonds as bearer instruments?
- [ ] Higher taxation
- [ ] Lack of secondary market
- [x] Increased risk of loss or theft
- [ ] Higher interest rates
> **Explanation:** Since coupon bonds are bearer instruments, there is an increased risk of loss or theft, as anybody holding the coupon can collect the interest.
### In which form do coupon bonds typically exist?
- [ ] Digital form only
- [ ] Electronic form only
- [ ] Physical certificates
- [x] Physical certificates with detachable coupons
> **Explanation:** Coupon bonds typically exist in physical form with detachable coupons that need to be presented for interest payments.
### Can coupon bonds be sold in secondary markets?
- [x] Yes
- [ ] No
- [ ] Only by government entities
- [ ] Only by authorized dealers
> **Explanation:** Coupon bonds can be sold in secondary markets, and their price generally reflects the remaining coupons and principal payments.
### Why might investors prefer registered bonds over coupon bonds?
- [ ] Higher interest rates
- [ ] Anonymity
- [x] Enhanced security and traceability
- [ ] Easier to convert to cash
> **Explanation:** Investors might prefer registered bonds over coupon bonds due to enhanced security and traceability, reducing the risk of loss and theft.
Thank you for exploring the detailed aspects of coupon bonds and participating in our sample quiz. Keep studying to deepen your financial knowledge!
