Coupon Bond: Definition, How They Work, Example, and Use Today

What Is a 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.

How a Coupon Bond Works

Coupon bonds are rare since most modern bonds are not issued in certificate or coupon form. Instead, bonds are formed electronically, though some holders still prefer to own paper certificates. For this reason, the coupon bond simply refers to the rate it projects rather than its physical nature in the form of certificates or coupons.

Typical bonds consist of semi-annual payments costing $25 per coupon. Coupons are usually described according to the coupon rate. The yield the coupon bond pays on the date of its issuance is called the coupon rate. The value of the coupon rate may change. Bonds with higher coupon rates are more attractive for investors since they provide higher yields. The coupon rate is calculated by taking the sum of all the coupons paid per year and dividing it with the bond's face value.

Real-World 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.

Special Consideration: Unregistered Bonds

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. In book-entry bonds, the investor gets receipts instead of certificates. Investors also get accounts handled by financial institutions. They are able to receive their interest payments through these accounts.