What is a coupon for a bond?

What is a coupon for a bond?

What Is a Coupon? A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a year divided by the face value of the bond in question).

What is coupon and zero coupon bond?

A bond's coupon rate is the percentage of its face value payable as interest each year. A bond with a coupon rate of zero, therefore, is one that pays no interest. ... Instead, a zero coupon bond generates a return at maturity.

What happens to the coupon bond?

If a coupon is higher than the prevailing interest rate, the bond's price rises; if the coupon is lower, the bond's price falls. The majority of bonds boast fixed coupon rates that remain stable, regardless of the national interest rate or changes in the economic climate.

What does a coupon do?

In marketing, a coupon is a ticket or document that can be redeemed for a financial discount or rebate when purchasing a product. Customarily, coupons are issued by manufacturers of consumer packaged goods or by retailers, to be used in retail stores as a part of sales promotions.

Why is interest called a coupon?

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.

What is a split coupon bond?

Split-coupon bond. A bond that begins as a zero-coupon bond paying no interest and converts to an interest paying bond on a future date.

How do you calculate the price of a coupon bond?

Coupon rate is calculated by adding up the total amount of annual payments made by a bond, then dividing that by the face value (or “par value”) of the bond. For example: ABC Corporation releases a bond worth $1,000 at issue. Every six months it pays the holder $50.

Do all bonds pay coupons?

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.

Who pays the coupon on a bond?

The buyer compensates you for this portion of the coupon interest, which generally is handled by adding the amount to the contract price of the bond. Bonds that don't make regular interest payments are called zero-coupon bonds – zeros, for short.

What are the benefits of coupons?

Coupons can help introduce new product lines and encourage customers to try a new, more profitable brand or service. Coupons can also help attract existing customers to come back to your store. The biggest con of using coupons is that they cost businesses money and may lead to lower profit for that sale.

How do you calculate bond coupon rate?

• BREAKING DOWN 'Coupon Rate'. A bond's coupon rate can be calculated by dividing the sum of the security's annual coupon payments and dividing them by the bond's par value.

Why buy a bond at a discount?

• A bond sells at a discount to its face value for one of the following reasons: Interest rate differential. The current market interest rate is higher than the interest rate being paid by the issuer, so investors pay less for the bond in order to derive a higher effective interest rate on their investment.

How does a bond coupon work?

• How Coupon Bonds Work. For this reason, the coupon bond simply refers to the rate it projects rather than its physical nature in the form of certificates or coupons. If an investor purchases a $1,000 ABC Company coupon bond and the coupon rate is 5%, the issuer provides the investor 5% interest every year.

What do bond coupon payments represent?

• Bond Valuation . The coupon payments represent the periodic interest payments from the bond issuer to the bondholder. The annual coupon payment is calculated be multiplying the coupon rate by the bond's face value. Since most bonds pay interest semiannually, generally one half of the annual coupon is paid to the bondholders every six months.