Saturday, May 9, 2009

Coupon bond

A Coupon bond specifies (1)a face value,(2)a term, and (3) the coupon rate, which is the percentage of the face value that will be paid annually as interest when the holder redeems coupons attached to the bond at specified points in time (say, every six months). These coupons gave coupon bonds their name. Upon maturity, the bondholder redeems the bond for the face value. If the bond is sold to the lender at face value (or par),the face value is the principle and the coupons represent the interest on the bond. For example, Suppose your bank purchases a 10 percent coupon bond at the face value of $10,000. In this case, the principle is $10,000-the price at which the bond is sold to the bank. Annual interest receipts are $1,000, or 10 percent of the principal amount. Sometimes coupon bonds sell at other than face value.

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