The coupon of a financial asset debt is an interest rate that is embodied in the payment to the holder of a certain percentage of the face value of the title, generally it refers to a bond of fixed income .

Many bonds are issued with coupons that pay their holder in different terms, and is reflected in the description of the bond as we have indicated in red (in a bond issued by the Spanish State -with a coupon payment of 5.15% per year- ).

Therefore the coupon payment can be:

  • Annual:in this case there is 1 payment per year.
  • Semiannually:in this case there are 2 payments per year.
  • Quarterly:in this case there are 4 payments per year.
  • Monthly:in this case there are 12 payments per year.

In general, the collection of coupons means that the owner of the asset obtains constant income, while keeping it in the portfolio. In addition, the investor can recover his investment after the end of the life of the asset (for amortization or conversion thereof); Or, you can sell or transfer that asset at any time by earning a profit or loss based on its price.

Logically, once the asset is sold or transmitted, it ceases to receive the coupons or interests that will be charged by the new owner.

Some bonds do not pay coupon, they are called zero coupon bonds. In this case, the investor receives the interest at the end of its life together with the principal. Therefore, in these bonds the interest rate and reinvestment risk is eliminated, the result being obtained as the difference between the issue value and the redemption value. In the case of acquiring it in the secondary market (that is, not at the time of issuance) such profitability comes from the difference between the price paid in the market and the reimbursement value.

Flow Structure

On the other hand, vouchers with coupons are issued in many different ways. In the example that we present below, the structure of payments and collections of a 5-year bond and annual coupon payments is represented. If the investor keeps it due, it pays the principal at the beginning of its life and receives 5 coupons and the return of the principal in the 5th year.

The zero – coupon bonds (no interim payments) issued at the discount will be issued for example 85% of its nominal value already maturity the investor will receive 100%, obtaining the difference of profitability. On the other hand, they can also be issued at their nominal value and on expiration receive a reimbursement premium, that is, issued at 100% and amortization at 102%.

Coupon Calculation

The calculation formula is very simple. For this we have to know the value at par of the bond in question and the coupon in percentage that pays the same.

Let’s see an example.

If a bond pays a coupon of 7.5% and its nominal value is 1,000 euros. What is the amount you will pay annually ?.

Interest = (7.5% / 100) x € 1,000 = € 0.075 x € 1,000 = € 75

A little history

The term coupon has its origin in that the old issues of loans made with physical titles included in the accrediting document itself that a series of small rectangles (coupons) were given to each obligator in which each of the successive expiration dates and the following collection of the income committed by the issuer of the securities.

Physical title with different coupons

Thus, the owner of the title charged these income by giving in return the coupon corresponding to the issuer of the title (having fewer and fewer coupons attached to its title). Obviously, this system has not been used for years, since it has been replaced by the accounting system and electronically, although the term coupon has been maintained.

by Abdullah Sam
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