coupon payment

(noun)

A periodic interest payment that the bondholder receives during the time between when the bond is issued and when it matures.

Related Terms

Examples of coupon payment in the following topics:

  • Impact of Payment Frequency on Bond Prices

    • Payment frequency can be annual, semi annual, quarterly, or monthly; the more frequently a bond makes coupon payments, the higher the bond price.
    • Bond prices is the present value of all coupon payments and the face value paid at maturity.
    • However, the present values of annuities of coupon payments vary among payment frequencies.
    • To put it differently, the more frequent a bond makes coupon payments, the higher the bond price.
    • Bond price is the present value of all coupon payments and the face value paid at maturity.

  • Present Value of Payments

    • F = face value, iF = contractual interest rate, C = F * iF = coupon payment (periodic interest payment), N = number of payments, i = market interest rate, or required yield, or observed / appropriate yield to maturity, M = value at maturity, usually equals face value, and P = market price of bond.
    • The bond price can be summarized as the sum of the present value of the par value repaid at maturity and the present value of coupon payments.
    • The present value of coupon payments is the present value of an annuity of coupon payments.
    • An annuity is a series of payments made at fixed intervals of time.
    • Bond price is the present value of coupon payments and face value paid at maturity.

  • Par Value at Maturity

    • A typical bond makes coupon payments at fixed intervals during the life of it and a final repayment of par value at maturity.
    • Together with coupon payments, the par value at maturity is discounted back to the time of purchase to calculate the bond price.
    • F = face value, iF = contractual interest rate, C = F * iF = coupon payment (periodic interest payment), N = number of payments, i = market interest rate, or required yield, or observed/ appropriate yield to maturity, M = value at maturity, usually equals face value, P = market price of bond.
    • The coupon payments of such bonds are also accordingly adjusted even though the coupon interest rate is unchanged.
    • Bond price is the present value of coupon payments and the par value at maturity.

  • Reinvestment Risk

    • For example, falling interest rates may prevent bond coupon payments from earning the same rate of return as the original bond.
    • Reinvestment risk affects the yield-to-maturity of a bond, which is calculated on the premise that all future coupon payments will be reinvested at the interest rate in effect when the bond was first purchased.
    • Interest rate on the bond - The higher the interest rate, the bigger the coupon payments that have to be reinvested, and, consequently, the reinvestment risk.
    • Zero coupon bonds are the only fixed-income instruments to have no reinvestment risk, since they have no interim coupon payments.

  • Zero-Coupon Bonds

    • A zero-coupon bond is a bond with no coupon payments, bought at a price lower than its face value, with the face value repaid at the time of maturity.
    • It does not make periodic interest payments, or have so-called "coupons," hence the term zero-coupon bond.
    • Examples of zero-coupon bonds include U.S.
    • In other words, the separated coupons and the final principal payment of the bond may be traded separately.
    • Investment banks or dealers separate coupons from the principal of coupon bonds, which is known as the "residue," so that different investors may receive the principal and each of the coupon payments.

  • Coupon Interest Rate

    • The coupon rate is the amount of interest that the bondholder will receive per payment, expressed as a percentage of the par value.
    • The name "coupon" arose because in the past, paper bond certificates were issued that had coupons attached to them, one for each interest payment.
    • On the due dates, the bondholder would hand in the coupon to a bank in exchange for the interest payment.
    • Such bonds make only one payment–the payment of the face value on the maturity date.
    • A coupon payment on a bond is a periodic interest payment that the bond holder receives during the time between when the bond is issued and when it matures.

  • Calculating the NPV

    • Cash inflows (such as coupon payments or the repayment of principal on a bond) have a positive sign while cash outflows (such as the money used to purchase the investment) have a negative sign.
    • The bond clearly states when each coupon payment will occur, the size of each payment, when the principal will be repaid, and the cost of the bond.
    • The business will receive regular payments, represented by variable R, for a period of time.
    • The payments are discounted using a selected interest rate, signified by the i variable.

  • Yield to Maturity

    • The Yield to maturity (YTM) or redemption yield of a bond or other fixed-interest security, such as gilts, is the internal rate of return (IRR, overall interest rate) earned by an investor who buys the bond today at the market price, assuming that the bond will be held until maturity, and that all coupon and principal payments will be made on schedule .
    • If a bond's coupon rate is less than its YTM, then the bond is selling at a discount.
    • If a bond's coupon rate is more than its YTM, then the bond is selling at a premium.
    • If a bond's coupon rate is equal to its YTM, then the bond is selling at par.
    • For instance, you buy ABC Company bond which matures in 1 year and has a 5% interest rate (coupon) and has a par value of $100.

  • Other Types of Bonds

    • A variation is a stepped-coupon bonds, whose coupon increases during the life of the bond.
    • Zero-coupon bonds pay no regular interest.
    • In other words, the separated coupons and the final principal payment of the bond may be traded separately .
    • However, as the principal amount grows, the payments increase with inflation.
    • Interest payments, and the principal upon maturity, are sent to the registered owner.

  • The Valuation of Bonds

    • A coupon bond differs from a discount bond because its interest rate is stated on the certificate.During the old days, an investor would detach a coupon from the bond and mail it to the corporation or government for an interest payment.Then the corporation or government would send a check to the bondholder.We show a coupon bond in Figure 3 with dated coupons at the bottom of the certificate.
    • This coupon bond is a U.S.
    • Treasury note with a face value of $20,000, or T-note for short.Moreover, U.S. government pays 10% interest every six months; consequently, the person who possesses this instrument would clip off one coupon and send it to the U.S. federal government for payment.Hence, the interest payment equals 0.1 × $20,000 × 0.5 = $1,000 for every six months.When the T-note matures on August 10, 2020, the bondholder receives $20,000.
    • We calculate the bond market price in Equation 3, and it, PV0, equals $1,076.15.Therefore, a corporation pays 4%interest on bonds with an 8% interest coupon rate.
    • Bearer Bonds: Who possesses these bonds receive the interest payment.Coupon bonds are usually bearer bonds.