A coupon bond, sometimes called a bearer bond or bond coupon, is a type of debt that comes with coupons for interest payments every six months. Unlike other bonds, the issuer doesn’t keep track of who buys them, and the buyer’s name isn’t on any certificate. Bondholders get these coupons from the time they buy the bond until it matures.
How Coupon Bond Works?
Coupon bonds are pretty uncommon these days because most new bonds aren’t issued as physical certificates or coupons. Nowadays, bonds are mostly digital, but some people still like having paper certificates. So, when we talk about coupon bonds, we’re really just referring to the interest rate they offer, not the actual paper form.
Typically, bonds pay out $25 every six months for each coupon, and these coupons are linked to what’s known as the coupon rate. The coupon rate is the yield that the bond offers when it’s first issued, and it can fluctuate. Investors tend to favor bonds with higher coupon rates because they yield more. To figure out the coupon rate, you add up all the coupons paid in a year and divide that by the bond’s face value.
The Example
When an investor buys a $1,000 coupon bond from ABC Company with a 5% coupon rate, they receive 5% interest annually. This translates to $50 each year, calculated by multiplying $1,000 by 0.05. To collect this interest, the investor just needs to detach the relevant coupon from the bond certificate and hand it over to an agent from the issuing company.
Conclusion
Coupon bonds are generally bearer bonds, meaning anyone who has the right coupons can claim the interest, even if they’re not the actual bond owner. This opens the door for potential tax evasion and fraud. On the other hand, modern bonds are usually registered, featuring physical certificates that outline the debt terms and the name of the registered holder who automatically gets interest payments from the issuer.
Some bonds are book-entry bonds, which are electronically recorded and connected to both the issuer and investors. With book-entry bonds, investors receive receipts instead of physical certificates and have accounts managed by financial institutions to receive their interest payments.