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Coupon bonds are usually bearer bonds. Anyone who provides the necessary coupons to the issuer can receive the interest payment regardless of whether that person is the actual owner of the bond. For this reason, coupon bonds present a lot of opportunities for tax evasion and other fraudulent acts. Modern bonds are typically registered bonds with physical certificates that provide the terms of the debt and the name of the registered holder who receives interest payments automatically from the issuing institution. Some bonds are in the form of book entry bonds, which are electronically registered and linked to the issuer and its investors.
By using Investopedia, you accept our. Your Money. Personal Finance. Financial Advice. Physical possession of the certificate was proof of ownership.
Several coupons, one for each scheduled interest payment, were printed on the certificate. At the date the coupon was due, the owner would detach the coupon and present it for payment an act called "clipping the coupon". The certificate often also contained a document called a talon , which when the original block of coupons had been used up could be detached and presented in exchange for a block of further coupons.
Not all bonds have coupons. Such bonds make only one payment: the payment of the face value on the maturity date.
Coupon Rate of a Bond
Normally, to compensate the bondholder for the time value of money , the price of a zero-coupon bond will always be less than its face value on any date before the maturity date. During the European sovereign-debt crisis , some zero-coupon sovereign bonds traded above their face value as investors were willing to pay a premium for the perceived safe-haven status these investments hold.
Along the way, investors receive interest payments, typically on a monthly basis. This is considered a low-risk investment, though the fees associated with it can eat into the profits. The bond unit investment trusts operate much like a mutual fund in the sense that you are investing in a large group of bonds and not just one. Instead, they put their money in a bond unit investment trust and receive that sort of diversity.
There are, in fact, a number of types of yield. The terms are important to understand because they are used to compare one bond with another to find out which is the better investment. To calculate the current yield for a bond with a coupon yield of 4.
You get a current yield of 4. The current yield has changed. Divide 4. Then multiply the total by You get a new current yield of 4.
Note: Price and yield are inversely related. As the price of a bond goes up, its yield goes down, and vice versa.
What a Bond Coupon Is and Why It Is Called That
If you buy a new bond at par and hold it to maturity, your current yield when the bond matures will be the same as the coupon yield. It is calculated by taking into account the total amount of interest you will receive over time, your purchase price the amount of capital you invested , the face amount or amount you will be paid when the issuer redeems the bond , the time between interest payments and the time remaining until the bond matures.
In addition to educational information, this resource provides real-time bond quotations and tools such as an accrued interest rate calculator. Fontinelle, E. NA, ND.