What is a coupon?
A coupon in the financial world is defined as the annual interest rate paid on a bond that is expressed as a percentage of its face value. This also can be referred to as a bond’s coupon rate, coupon percentage rate or nominal yield.
“Coupon” also can refer to the detachable coupons found on certain bond certificates. Bonds that have such coupons also are called bearer bonds, coupon bonds or bonds that are not registered, meaning that if you possess them, you own them.
However, these coupon bonds have started to fall out of favor because, if they are lost, damaged or stolen, the investor has no means of recovery available to him or her. In addition, these coupon bonds sport a significant level of anonymity, making them prime attractions for money launderers.
To avoid these dangers, issuers and investors prefer to keep electronic records on their bonds, instead of physical copies.
Coupons have come to be a defining feature of bonds because they are major influencers on their pricing. They allow investors to compare bonds and balance feasibility.
An important distinction that investors can make is based on the size of a bond’s coupon. It addresses how sensitive that bond is to changes in interest rates. The higher the coupon’s percentage rate, the less its price will fluctuate with interest rates.
No new coupon bearer bonds are being issued, and anyone who wishes to cash outstanding coupon bonds must disclose their name, address and Social Security number to the bank in which they deposit their bond.
This is required so that the IRS can locate the original owners of the outstanding coupon bonds. Currently, there are only a few banking agents still in operation who will cash your coupon bonds as is.
As an alternative, you may have to send your coupon bonds to a processing center to get paid.
To understand how a coupon works, consider this example. If a bond has a face value of $2,000, with a coupon of 10 percent, that bond will pay $40 per year. Usually, this payment is distributed semiannually, meaning that the investor will receive two payments of $20 for that year.
Do you want to know more about corporate bonds? Check out this Bankrate story.