What is Coupon Bond?
A coupon bond, also referred to as a bearer bond or bond coupon, is a debt obligation with coupons attached that represent semiannual interest payments. With coupon bonds, there are no records of the purchaser kept by the issuer; the purchaser’s name is also not printed on any kind of certificate. Bondholders receive these coupons during the period between the issuance of the bond and the maturity of the bond.
A coupon bond is a bond that is essentially anonymous, with no name on the bond or sale record. The bond represents semi-annual interest payments.
Coupon bonds are increasingly rare since the advent of electronic payments.
How Does a Coupon Bond Work?
Upon the issuance of the bond, a coupon rate on the bond’s face value is specified. The issuer of the bond agrees to make annual or semi-annual interest payments equal to the coupon rate to investors. These payments are made until the bond’s maturity.
Let’s imagine that Apple Inc. issued a new four-year bond with a face value of $100 and an annual coupon rate of 5% of the bond’s face value. In this case, Apple will pay $5 in annual interest to investors for every bond purchased. After four years, on the bond’s maturity date, Apple will make its last coupon payment. It will also pay the investor back the face value of the bond.
Who should Invest in Coupon Bonds?
Investors make money from bearer bonds on maturity. The interest is paid to them at the maturity of the bond. The time required to reach maturity depends on whether the bond is a long-term or short-term investment. Short-term bearer bonds are known as bills. In case the coupon bond is for a long period, from fifteen to twenty years, then the investor gets paid their interest after a period of two decades.
These bonds are not a good option for someone looking for a steady flow of income. However, they are ideal for families who are looking into systematic investment plans. If you want a vacation home after your retirement, a coupon bond is a good option. Bearer bonds are also a good way of passing on wealth to your heir. A coupon bond is a good way of increasing your income over a period of time.
Coupon Bond Rates
The interest rate that a coupon bond pays is typically higher than the face value, which can confuse some investors who are not familiar with this type of investment vehicle. This high-interest payment is referred to as a “coupon” and represents how much money an investor can expect to receive in interest payments throughout the life of the bond.
For example, if a $1000 coupon bond pays out at a rate of five percent each year until its maturity date, then that means it will pay out $50 every six months over several years.
Example of a Coupon Bond
If an investor purchases a $1,000 ABC Company coupon bond and the coupon rate is 5%, the issuer provides the investor with a 5% interest every year. This means the investor gets $50, the face value of the bond derived from multiplying $1,000 by 0.05, every year.
For the investor to claim his interest on the bond, he simply takes the corresponding coupon from the provided bond certificate and gives it to an agent of the issuing institution.