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Definition of Coupon

Coupon Image 1


Detachable certificate attached to a bond that shows the amount of
interest payable at regular intervals, usually semi-annually.Originally
coupons were actually attached to the bonds and had to be cut off or “clipped”
to redeem them and receive the interest payment.


The annual interest payment associated with a bond.


The interest payments paid to the bondholder.


The periodic interest payment made to the bondholders during the life of the bond.

Related Terms:

Coupon Bond

Any bond with a coupon. Contrast with discount bond.

Coupon / Coupons

The periodic interest payment(s) made by the issuer of a bond
(debt security). Calculated by multiplying the face value of the
security by the coupon rate.

Coupon dates

The dates when the coupons are paid. Typically a bond pays
coupons annually or semi-annually.

Coupon equivalent yield

True interest cost expressed on the basis of a 365-day year.

Coupon Image 2

Coupon payments

A bond's interest payments.

Coupon rate

In bonds, notes or other fixed income securities, the stated percentage rate of interest, usually
paid twice a year.

Coupon Rate

The rate of interest paid on a debt security. Generally stated on an
annual basis, even if the payments are made at some other

Coupon rate

The nominal interest rate that the issuer promises to pay the
buyer of a bond.

coupon rate

Annual interest payment as a percentage of face value.

Current coupon

A bond selling at or close to par, that is, a bond with a coupon close to the yields currently
offered on new bonds of a similar maturity and credit risk.

Current-coupon issues

Related: Benchmark issues

Full coupon bond

A bond with a coupon equal to the going market rate, thereby, the bond is selling at par.

High-coupon bond refunding

Refunding of a high-coupon bond with a new, lower coupon bond.

Coupon Image 3

Level-coupon bond

Bond with a stream of coupon payments that are the same throughout the life of the bond.

Long coupons

1) Bonds or notes with a long current maturity.
2) A bond on which one of the coupon periods, usually the first, is longer than the other periods or the standard period.

Long coupons

1) Bonds or notes with a long current maturity.
2) A bond on which one of the coupon
periods, usually the first, is longer than the other periods or the standard period.

Low-coupon bond refunding

Refunding of a low coupon bond with a new, higher coupon bond.

Pass-through coupon rate

The interest rate paid on a securitized pool of assets, which is less than the rate
paid on the underlying loans by an amount equal to the servicing and guaranteeing fees.

Weighted average coupon

The weighted average of the gross interest rate of the mortgages underlying the
pool as of the pool issue date, with the balance of each mortgage used as the weighting factor.

Zero coupon bond

Such a debt security pays an investor no interest. It is sold at a discount to its face price
and matures in one year or longer.

Zero-coupon bond

A bond in which no periodic coupon is paid over the life of the contract. Instead, both the
principal and the interest are paid at the maturity date.

Zero-coupon Bond

A security that makes no interest payments; it is sold at a discount
at issue and then repaid at face value at maturity

Zero-Coupon Bond

See discount bond.

Zero-coupon bond, or Zero

A bond that, instead of carrying a coupon, is sold
at a discount from its face value, pays no interest during its life, and pays the
principal only at maturity.

Zero curve, zero-coupon yield curve

A yield curve for zero-coupon bonds;
zero rates versus maturity dates. Since the maturity and duration (Macaulay
duration) are identical for zeros, the zero curve is a pure depiction of supply/
demand conditions for loanable funds across a continuum of durations and
maturities. Also known as spot curve or spot yield curve.

Accrued interest

The accumulated coupon interest earned but not yet paid to the seller of a bond by the
buyer (unless the bond is in default).

Bearer bond

Bonds that are not registered on the books of the issuer. Such bonds are held in physical form by
the owner, who receives interest payments by physically detaching coupons from the bond certificate and
delivering them to the paying agent.

Benchmark issues

Also called on-the-run or current coupon issues or bellwether issues. In the secondary
market, it's the most recently auctioned Treasury issues for each maturity.

Break-even payment rate

The prepayment rate of a MBS coupon that will produce the same CFY as that of
a predetermined benchmark MBS coupon. Used to identify for coupons higher than the benchmark coupon
the prepayment rate that will produce the same CFY as that of the benchmark coupon; and for coupons lower
than the benchmark coupon the lowest prepayment rate that will do so.

Current yield

For bonds or notes, the coupon rate divided by the market price of the bond.

current yield

Annual coupon payments divided by bond price.

Cushion bonds

High-coupon bonds that sell at only at a moderate premium because they are callable at a
price below that at which a comparable non-callable bond would sell. Cushion bonds offer considerable
downside protection in a falling market.

Deep-discount bond

A bond issued with a very low coupon or no coupon and selling at a price far below par
value. When the bond has no coupon, it's called a zero coupon bond.

Discount bond

Debt sold for less than its principal value. If a discount bond pays no interest, it is called a
zero coupon bond.

Discount Bond

A bond with no coupons, priced below its face value; the return on this bond comes from the difference between its face value and its current price.

Dual-currency issues

Eurobonds that pay coupon interest in one currency but pay the principal in a different


The expected life of a fixed-income security considering its coupon
yield, interest payments, maturity, and call features. As market interest rates
rise, the duration of a financial instrument decreases. See Macaulay duration.

Equivalent bond yield

Annual yield on a short-term, non-interest bearing security calculated so as to be
comparable to yields quoted on coupon securities.

Euro straight

A fixed-rate coupon Eurobond.

Fixed-dollar obligations

Conventional bonds for which the coupon rate is set as a fixed percentage of the par value.

Forward rate

The future interest rate of a bond inferred from the term
structure, especially from the yield curve of zero-coupon bonds, calculated from
the growth factor of an investment in a zero held until maturity.


Refers to the characteristics and/or experience of the total universe of a coupon of MBS sector type;
that is, in contrast to a specific pool or collateral group, as in a specific CMO issue.

Give up

The loss in yield that occurs when a block of bonds is swapped for another block of lower-coupon
bonds. Can also be referred to as "after-tax give up" when the implications of the profit or loss on taxes are

Interest payments

Contractual debt payments based on the coupon rate of interest and the principal amount.

Inverse floating rate note

A variable rate security whose coupon rate increases as a benchmark interest rate declines.

Issue date

The date a security is first offered for sale. That date usually
determines when interest payments, known as coupons, are made.

Lag response of prepayments

There is typically a lag of about three months between the time the weighted
average coupon of an MBS pool has crossed the threshold for refinancing and an acceleration in prepayment
speed is observed.

Liquid yield option note (LYON)

Zero-coupon, callable, putable, convertible bond invented by Merrill

Liquid yield option note (LYON)

Zero-coupon, callable, putable, convertible bond invented by Merrill Lynch & Co.

Long rate

The yield on a zero-coupon Treasury bond.

Macaulay duration

A widely used measure of price sensitivity to yield
changes developed by Frederick Macaulay in 1938. It is measured in years and
is a weighted average-time-to-maturity of an instrument. The Macaulay
duration of an income stream, such as a coupon bond, measures how long, on
average, the owner waits before receiving a payment. It is the weighted
average of the times payments are made, with the weights at time T equal to
the present value of the money received at time T.

Odd first or last period

Fixed-income securities may be purchased on dates
that do not coincide with coupon or payment dates. The length of the first and
last periods may differ from the regular period between coupons, and thus the
bond owner is not entitled to the full value of the coupon for that period.
Instead, the coupon is pro-rated according to how long the bond is held during
that period.

Pass-through rate

The net interest rate passed through to investors after deducting servicing, management,
and guarantee fees from the gross mortgage coupon.

Payment-In-Kind (PIK)

bond A bond that gives the issuer an option (during an initial period) either to make
coupon payments in cash or in the form of additional bonds.


The gain in yield that occurs when a block of bonds is swapped for another block of higher-coupon bonds.

Presold issue An issue

that is sold out before the coupon announcement.

Pure-discount bond

A bond that will make only one payment of principal and interest. Also called a zerocoupon
bond or a single-payment bond.

Put provision

Gives the holder of a floating-rate bond the right to redeem his note at par on the coupon
payment date.

Realized compound yield

Yield assuming that coupon payments are invested at the going market interest
rate at the time of their receipt and rolled over until the bond matures.

Red herring

A preliminary prospectus containing information required by the SEC. It excludes the offering
price and the coupon of the new issue.

Return-to-maturity expectations

A variant of pure expectations theory which suggests that the return that an
investor will realize by rolling over short-term bonds to some investment horizon will be the same as holding
a zero-coupon bond with a maturity that is the same as that investment horizon.


For a fee, bankers will hold in their vault, clip coupons on, and present for payment at maturity
bonds and money market instruments.


Refers to a group of securities that are similar with respect to maturity, type, rating, industry, and/or coupon.

Spot rate

The theoretical yield on a zero-coupon Treasury security.

Step-up bond

A bond that pays a lower coupon rate for an initial period which then increases to a higher
coupon rate. Related: Deferred-interest bond, Payment-in-kind bond

Strip mortgage participation certificate (strip PC)

Ownership interests in specified mortgages purchased
by Freddie Mac from a single seller in exchange for strip PCs representing interests in the same mortgages.
Stripped bond Bond that can be subdivided into a series of zero-coupon bonds.

Substitution swap

A swap in which a money manager exchanges one bond for another bond that is similar in
terms of coupon, maturity, and credit quality, but offers a higher yield.

Theoretical spot rate curve

A curve derived from theoretical considerations as applied to the yields of
actually traded Treasury debt securities because there are no zero-coupon Treasury debt issues with a maturity
greater than one year. Like the yield curve, this is a graphical depiction of the term structure of interest rates.

Total return

In performance measurement, the actual rate of return realized over some evaluation period. In
fixed income analysis, the potential return that considers all three sources of return (coupon interest, interest
on interest, and any capital gain/loss) over some i nvestment horizon.

Treasury bond

Long-term debt obligation of the U.S. government that makes
coupon payments semi-annually and is sold at or near par value in $1000
denominations or higher. Face value is paid at maturity.

True interest cost

For a security such as commercial paper that is sold on a discount basis, the coupon rate
required to provide an identical return assuming a coupon-bearing instrument of like maturity that pays
interest in arrears.

Variable rate CDs

Short-term certificate of deposits that pay interest periodically on roll dates. On each roll
date, the coupon on the CD is adjusted to reflect current market rates.


a. Measure of return on an investment, stated as a percentage of price.
Yield can be computed by dividing return by purchase price, current market
value, or other measure of value.
b. Income from a bond expressed as an
annualized percentage rate.
c. The nominal annual interest rate that gives a
future value of the purchase price equal to the redemption value of the security.
Any coupon payments determine part of that yield.

Yield to call

The percentage rate of a bond or note, if you were to buy and hold the security until the call date.
This yield is valid only if the security is called prior to maturity. Generally bonds are callable over several
years and normally are called at a slight premium. The calculation of yield to call is based on the coupon rate,
length of time to the call and the market price.

Yield to maturity

The percentage rate of return paid on a bond, note or other fixed income security if you
buy and hold it to its maturity date. The calculation for YTM is based on the coupon rate, length of time to
maturity and market price. It assumes that coupon interest paid over the life of the bond will be reinvested at
the same rate.







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