Bond Coupon
A bond coupon refers to the fixed interest payment that a bond issuer makes to bondholders at regular intervals, typically semi-annually or annually. The coupon rate is predetermined at the time of issuance and is based on the bond's face value. Bond coupons are a key source of income for bond investors and are an essential component of bond valuation.
8 Key excerpts on "Bond Coupon"
eBook - ePubAccounting for Investments, Volume 2
A Practitioner's Handbook
- R. Venkata Subramani(Author)
- 2011(Publication Date)
- Wiley(Publisher)
...Local governments issue municipal bonds to finance their projects. Corporate entities also issue bonds or borrow money from a bank or from the public. The term “fixed income security” is also applied to an investment in a bond that generates a fixed income on such investment. Fixed income securities can be distinguished from variable return securities such as stocks where there is no assurance about any fixed income from such investments. For any corporate entity to grow as a business, it must often raise money to finance the project, fund an acquisition, buy equipment or land or invest in new product development. Investors will invest in a corporate entity only if they have the confidence that they will be given something in return commensurate with the risk profile of the company. Bond Coupon The coupon or coupon rate of a bond is the amount of interest paid per year expressed as a percentage of the face value of the bond. It is the stated interest rate that a bond issuer will pay to a bond holder. For example, if an investor holds $100,000 nominal of a 5 percent bond then the investor will receive $5,000 in interest each year, or the same amount in two installments of $2,500 each if interest is payable on a half-yearly basis. The word “coupon” indicates that bonds were historically issued as bearer certificates, and that the possession of the certificate was conclusive proof of ownership. Also, there used to be printed on the certificate several coupons, one for each scheduled interest payment covering a number of years. At the due date the holder (investor) would physically detach the coupon and present it for payment of the interest. Bond maturity The bond’s maturity date refers to a future date on which the issuer pays the principal to the investor. Bond maturities usually range from one year up to 30 years or even more...
eBook - ePubFixed Income Securities
Concepts and Applications
- Sunil Kumar Parameswaran(Author)
- 2019(Publication Date)
- De Gruyter(Publisher)
...The name came about because in earlier days bonds were issued with a booklet of post-dated coupons. On an interest payment date, the holder was expected to detach the relevant coupon and claim his payment. Even today, bearer bonds come with a booklet of coupons. These are bonds where no record of ownership is maintained, unlike in the case of conventional or registered bonds. Thus the holder of a bearer bond needs to produce the coupon to claim the interest that is due. The coupon may be denoted as a rate or as a dollar value. We will denote the coupon rate by c. The dollar value, C, is therefore given by c × M. Most bonds pay interest on a semiannual basis, and consequently the semiannual cash flow is c × M / 2. Semiannual coupons are the norm in the UK, US, Japan, and Australia. However, in certain regions like the European Union, bonds typically pay annual coupons. Consider a bond with a face value of $1,000 that pays a coupon of 8% per annum on a semiannual basis. The annual coupon rate is 0.08. The semiannual coupon payment is 0.08 × 1, 000 / 2 = $ 40. Yield to Maturity The yield to maturity, like the coupon rate, is also an interest rate. The difference is that whereas the coupon rate is the rate of interest paid by the issuer, the yield to maturity, commonly referred to as the YTM, is the rate of return required by the market. At a given point in time, the yield may be greater than, equal to, or less than the coupon rate. The YTM is denoted by y and is the rate of return that a buyer gets when acquiring the bond at the prevailing price and holding it to maturity. Valuation of a Bond To value a bond, we first assume that we are standing on a coupon payment date. That is, we assume that a coupon has just been received, and consequently the next coupon is exactly six months or one period away. If T is the term to maturity in years, we have N coupons remaining where N = 2 T...
eBook - ePub- Robert Irons(Author)
- 2019(Publication Date)
- Routledge(Publisher)
...The issuer of the bond agrees to repay the debt in full on a certain date and to make regular interest payments until that date (assuming the life of the debt is more than one year). A debtor issues a bond (a firm or a government), and a creditor buys a bond (an investor, either an individual or an institution, such as a hedge fund, or an insurance company, or a mutual fund). All bonds have most or all of the following features: An issue date (the date on which the bond was issued), a maturity date (the date on which the contract ends, and the loan amount is repaid) and an original maturity (the time between the issue date and the maturity date). Thus, a bond that is issued on March 1, 2018 and is due to mature on March 1, 2028 has an original maturity of ten years. On March 1, 2019, the bond will have nine years remaining to maturity, but its original maturity will always be ten years. A par value, or face value, which is usually $1,000 or some multiple thereof. It is clearly marked on the face of the bond. A coupon interest rate (or coupon rate), which is the percentage of the par value that the holder of the bond will earn annually. Thus, a $1,000 par value bond with a 4.50% coupon rate will pay $45.00 in interest per year. Interest payments are typically made semiannually (twice a year), and so the investor in this case would receive $22.50 interest per bond every six months. Most bonds have fixed interest payments, but there are some variable interest rate bonds. Variable rate bonds tend to have their interest payments tied to some other rate, such as the LIBOR (London Interbank Offer Rate), or the rate of inflation. For this chapter, we will assume that the bonds in question have a fixed coupon rate. Note that there are bonds without coupons, known as zero coupon bonds, or zeros. These are bonds whose time to maturity is less than one year...
eBook - ePubTreasury Finance and Development Banking
A Guide to Credit, Debt, and Risk
- Biagio Mazzi(Author)
- 2013(Publication Date)
- Wiley(Publisher)
...For example, if a bond trades below par and the yield is Y, then we know that the coupon C must be such that c < y. Conversely, if we know that a bond pays a coupon C and I know that the yield is such that C > Y, we also know that the bond trades above par. Let us stress the importance of the concept of yield by looking at the word itself. A bond can be roughly considered to be made of two parts, the principal and the coupon. The principal is the amount of money the investor lends to the borrower and is the main component of the deal, the coupon payments can be seen as the compensation the investor requires for delaying the consumption of the principal. 3 We have seen that the borrower sets the coupon by making sure that, once the bond is discounted and taking into account the market’s perception of the borrower’s own credit risk, the price is more or less par. This means that the coupon is the element taking care of the borrower’s credit. Bonds, however, can be very long dated instruments and between the time the coupon is set and a subsequent time, the credit standing of the borrower might change, making the coupon value irrelevant as a credit signal. Moreover, irrespective of the price paid for the bond, at maturity the investor receives the full principal amount, the unit of measure being the principal amount. Here is where the yield plays a crucial role in telling how much the investment is really yielding. If an investor pays 95 for a bond with a 5% (of 100, of course) annual coupon, then the investment yields more than simply 5%. For the most liquid bonds the yield plays such an important role that it can be traded alongside the bond price (not separately, of course, as the trader chooses to quote one or the other). 5.2.3 Duration We have not mentioned up to now in any context the concept of sensitivity, that is, the impact of the price of a financial instrument due to a small movement in one of the variables leading to its value...
eBook - ePubInvesting in Fixed Income Securities
Understanding the Bond Market
- Gary Strumeyer(Author)
- 2012(Publication Date)
- Wiley(Publisher)
...corporate bonds typically pay interest semiannually. Because of this convention, the bondholder will receive half the annual coupon interest payment every six months. Thus, you would receive.5 × 6 percent × $1,000, or $30 every six months until the bond matures. (We are familiar with this concept and its implications from our calculations of compounded interest.) On the maturity date, you will receive the par, or face, amount of the loan as a lump sum plus the final coupon interest payment. Now that we have the basic structure of a bond, we can begin to understand how a bond is priced by the market. The bond’s coupon payments and par amount comprise its expected cash flows. We expect those cash flows to be received at predetermined dates in the future. Those dates are typically determined by the maturity date of the bond. In our example, the maturity date is September 15, 2021. If our bond pays interest semiannually, its expected coupon payment dates are March 15th and September 15th of each year until 2021. Many bonds have short or long first coupon dates depending on when they are issued relative to the maturity month. Since our expected cash flows have discrete dates in the future, we can view the bond as an ordinary annuity with a one-time (often called a lump sum) payment at the end. We can combine our equations for the present value of an annuity and the present value of a one-time payment to help us value the bond’s package of cash flows. The present value of the bond’s cash flows determines, and in fact equals, the price at which this bond should be trading in the market...
eBook - ePubInterest Rate Markets
A Practical Approach to Fixed Income
- Siddhartha Jha(Author)
- 2011(Publication Date)
- Wiley(Publisher)
...As with a zero-coupon bond, the price of a bond is the present value of its total cash flows. The notion of price being a discounted cash flow is an important one and is more general than just for bonds. To price a bond, we recast it in terms of an instrument we already know how to price: a zero-coupon bond. Consider a bond that pays $2 each year and returns the principal of $100 after 10 years. Although yearly payments are not as common in the United States (e.g., Treasuries are semiannual), annual payments serve to keep the examples simple. The cash flows are shown graphically in Figure 2.1. FIGURE 2.1 Simple View of the Cash Flows of a 10-Year Annual Coupon Bond Notice that in the 10th year, there is a $102 payment, which is actually a combination of two different payments; the first is $2 as the final interest payment and $100 as the returned principal. Instead of considering this as one security, we can consider each $2 payment as a zero-coupon bond itself and the final $100 payment as another zero-coupon bond. This way a fixed rate bond paying interest at a regular interval can be thought of as a package of zero-coupon bonds. The price of the bond therefore is the sum of the prices of the zero-coupon bonds that form the package. The price displayed in the market for a bond is generally the “clean price” whereas the true price at which actual money exchange happens is the “dirty price.” The difference between these is accrued interest. Accrued interest is applicable when bonds are bought and sold between coupon periods. Figure 2.1 assumes a clean transaction with coupons presented in regular intervals, but if the bond is bought between coupon payment dates, the buyer owes the seller of the bond the fraction of the coupon up to that date...
eBook - ePub- Steven Peterson(Author)
- 2012(Publication Date)
- Wiley(Publisher)
...Chapter 2 Fixed Income Securities What's past is prologue. —William Shakespeare, The Tempest A security is a financial asset that yields a measurable payoff, which may be state dependent (for example, it pays $1 if it rains and zero otherwise). The return to the security is the percentage change in the security's value over some well-defined period of time. That return is fixed if payoffs do not vary over the life of the asset. Bonds are securities paying fixed payoffs (coupons). U.S. Treasuries are the least risky bonds because they have the smallest relative likelihood of defaulting on their payoffs. Corporate and municipal bonds are generally riskier because they do not have the power of the federal government (the taxpayer) to guarantee that bondholders will receive the promised payoffs. Bond market participants will therefore pay close attention to bond rating agencies like Standard & Poor's, Moody's, and Fitch when pricing the present value of future coupon streams. Credit risk is covered in more detail in Chapter 11. In general, a bond is a loan; the holder of the bond is a creditor and the original seller of the bond is the borrower. In the case of government bonds, creditors have a claim on taxpayers (unless the government defaults on its debt). In the case of the corporate bond, the bondholder (creditor) has a claim to the assets of the firm and their claims generally are senior to shareholders (holders of equity, or stock). Thus, there are risks that cash flows like coupons or principal will not be paid and, as a result, bondholders may seek to insure their claims by holding credit default swaps. Credit default swaps are similar to insurance policies. Buying and selling credit default swaps is commonly referred to as buying and selling protection. If the borrower defaults, then the creditor collects on the credit default swap, which allows them to partially or fully hedge their loss...
eBook - ePub- Frank J. Fabozzi, Frank J. Fabozzi(Authors)
- 2012(Publication Date)
- Wiley(Publisher)
...Besides, if the U.S. government ever does default, we will have other things to worry about than valuing bonds. For Treasury coupon securities, the cash flows consist of the coupon interest payments every six months up to and including the maturity date and the principal repayment at the maturity date. Many fixed income securities have features that make estimating their cash flows problematic. These features may include one or more of the following: 1. The issuer or the investor has the option to change the contractual due date of the repayment of the principal. 2. The coupon and/or principal payment is reset periodically based on a formula that depends on one or more market variables (e.g., interest rates, inflation rates, exchange rates, etc.). 3. The investor has the choice to convert or exchange the security into common stock or some other financial asset. Callable bonds, putable bonds, mortgage-backed securities, and asset-backed securities are examples of (1). Floating-rate securities and Treasury Inflation Protected Securities (TIPS) are examples of (2). Convertible bonds and exchangeable bonds are examples of (3). 1 For securities that fall into the first category, a key factor determining whether the owner of the option (either the issuer of the security or the investor) will exercise the option to alter the security's cash flows is the level of interest rates in the future relative to the security's coupon rate. In order to estimate the cash flows for these types of securities, we must determine how the size and timing of their expected cash flows will change in the future. For example, when estimating the future cash flows of a callable bond, we must account for the fact that when interest rates change, the expected cash flows change. This introduces an additional layer of complexity to the valuation process...
