Coupon - Financial definition
Concise definition of the term coupon
The coupon represents the interest which the issuer of a bond pays to the holder. It is expressed as a percentage of the nominal.
Comprehensive definition of the term coupon
Origin of the term
The term coupon dates back to the time where bonds still were printed certificates, accompanied by a sheet of coupons of which the bearer would detach one at each interest payment date and exchange it for cash at the bank.
The designation has remained, although bonds are no longer issued as physical certificates for a long time now.
Coupon types
There are several types of coupons:
Depending on their value
- Fixed coupons
By far the most frequent type. The coupon is a fixed percentage of the nominal of the bond, which applies throughout the life of the bond. - Variable or revisable coupons
Coupon rate is based on an interest rate index such as a Libor or Euribor rate, plus generally a margin. - Zero coupons
Zero-coupon bonds do not have any coupon detach during their lifetime but pay all of the interest at maturity. They are generally issued at a discount and redeemed at par. - «Step-up» coupons
Step-up coupons are coupons of which the rate changes with time, according to a schedule fixed at the bond's issuance. This type of coupon is not very frequent, and can be found in small issues like private placements or in structured securities.
Coupon frequency
The vast majority of bond issues pay annual or semiannual coupons, with other frequencies existing as well, but are much less common.
In Europe, the most common coupon frequency is annual, the exceptions being Italy and Great Britain where semi-annual coupon payments are more frequent.
In the United States, coupon payments generally are made semi-annually.
Value of a coupon
The cash value of a bond's coupon is calculated by multiplying the bond's face value with the nominal coupon rate.
A bond with a face value of 1,000 EUR and a 4.00% fixed annual coupon, for example, will earn its bearer 40 EUR of interest each year.
A bond with a face value of 1,000 EUR and a 4.00% fixed annual coupon, for example, will earn its bearer 40 EUR of interest each year.