coupon

Examples of coupon in the following topics:

• Factors Affecting the Price of a Bond

  • A bond's book value is affected by its term, face value, coupon rate, and discount rate.
  • A bond's coupon is the interest rate that the business must pay on the bond's face value.
  • While the coupon rate is generally a fixed amount, it can also be "indexed. " This means that the interest rate is calculated by taking an established rate that fluctuates over time, such as a bank's lending rate, and adding a "premium" percentage amount to determine the bond's coupon rate.
  • As a result, the interest that is paid to the bond holder fluctuates over time with an indexed coupon rate.
  • Explain how a bond's value is affected by its term, face value, coupon and discount rate

• Valuing Zero-Coupon Bonds

  • The value of a zero-coupon bond equals the present value of its face value discounted by the bond's contract rate.
  • A zero-coupon bond with requires repayment of $100,000 in 3 years.
  • A zero-coupon bond is one that does not pay interest over the term of the bond.
  • Zero-Coupon Bond Value = Face Value of Bond / (1+ interest Rate)
  • It is important when completing the zero-coupon bond calculation to ensure the time period and term of the bond are expressed in similar terms.

• Bond Valuation Method

  • The bond's contract rate is another term for the bond's coupon rate.
  • If the market rate is greater than the coupon rate, the bonds will probably be sold for an amount less than the bonds' face value and the business will have to report a "bond discount. " The value of the bond discount will be the difference between what the bonds' face value and what the business received when it sold the bonds.
  • If the market rate is less than the coupon rate, the bonds will probably be sold for an amount greater than the bonds' value.
  • If the market and coupon rates differ, the issuing company must calculate the present value of the bond to determine what price to charge when it sells the security on the open market.

• Types of Bonds

  • Coupon bonds carry detachable coupons for the interest they pay.
  • At the end of each interest period, the owner clips the coupon for the period and presents it to a stated party, usually a bank, for collection.
  • These have a coupon that remains constant throughout the life of the bond.
  • A variation is stepped-coupon bonds, whose coupon increases during the life of the bond.
  • Also known as FRNs or floaters, these have a variable coupon that is linked to a reference rate of interest, such as LIBOR or Euribor.

• Redeeming at Maturity

  • Bonds can be classified to coupon bonds and zero coupon bonds.
  • For coupon bonds, the bond issuer is supposed to pay both the par value of the bond and the last coupon payment at maturity.
  • In case of a zero coupon bond, only the amount of par value is paid when the bond is redeemed at maturity.

• Characteristics of Bonds

  • In finance, bonds are a form of debt: the creditor is the bond holder, the debtor is the bond issuer, and the interest is the coupon.
  • A bond is a debt security under which the bond issuer owes the bond holder a debt including interest or coupon payments and or a future repayment of the principal on the maturity date.
  • Interest on bonds, or coupon payments, are normally payable in fixed intervals, such as semiannually, annually, or monthly.
  • The coupon is the interest rate that the issuer pays to the bond holders.
  • It can also refer to the yield to maturity or redemption yield, which is a more useful measure of the return of the bond, taking into account the current market price, and the amount and timing of all remaining coupon payments and of the repayment due on maturity.

• Issuing Bonds

  • If a bond has a coupon interest rate that is higher than the market interest rate it is considered a premium.
  • Bonds are considered issued at a discount when the coupon interest rate is below the market interest rate.That means a company selling bonds at a discount rate receive less than the face value of the bond in the sale.

• Bonds Payable and Interest Expense

  • Journal entries are required to record initial value and subsequent interest expense as the issuer pays coupon payments to the bondholder.