Often the last tranche in a CMO, the accretion bond, or Z-tranche, receives no cash payments for an extended period of time until the previous tranches are retired. While the other tranches are outstanding, the Z-tranche receives credit for periodic interest payments that increase its face value but are not paid out. When the other tranches are retired, the Z-tranche begins to receive cash payments that include both principal and continuing interest. Often the last tranche in a CMO, the accrual bond or Z-tranche receives, no cash payments for an extended period of time until the previous tranches are retired. A mortgage loan on which interest rates are adjusted at regular intervals according to predetermined criteria.

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A coupon rate is the yield paid by a fixed-income security; a fixed-income security s coupon rate is simply just the annual coupon payments paid by the issuer relative to the bond s face or par value. The coupon rate is the yield the bond paid on its issue date. This yield changes as the value of the bond changes, thus giving the bond s yield to maturity.

A bond s coupon rate can be calculated by dividing the sum of the security s annual coupon payments and dividing them by the bond s par value. All else held equal, bonds with higher coupon rates are more desirable for investors than those with lower coupon rates. The coupon rate is the interest rate paid on a bond by its issuer for the term of the security. The term "coupon" is derived from the historical use of actual coupons for periodic interest payment collections.

Once set at the issuance date, a bond s coupon rate remains unchanged and holders of the bond receive fixed interest payments at a predetermined time frequency. A bond issuer decides on the coupon rate based on prevalent market interest rates, among others, at the time of the issuance. Market interest rates change over time and as they move higher or lower than a bond s coupon rate, the value of the bond increases or decreases, respectively.

Changing market interest rates affect bond investment results. Since a bond s coupon rate is fixed all through the bond s maturity, a bondholder is stuck with receiving comparably lower interest payments when the market is offering a higher interest rate. An equally undesirable alternative is selling the bond for less than its face value at a loss. If the market rate turns lower than a bond s coupon rate, holding the bond is advantageous, as other investors may want to pay more than the face value for the bond s comparably higher coupon rate.

Thus, bonds with higher coupon rates provide a margin of safety against rising market interest rates. When investors buy a bond initially at face value and then hold the bond to maturity, the interest they earn on the bond is based on the coupon rate set forth at the issuance. For investors acquiring the bond on the secondary market, depending on the prices they pay, the return they earn from the bond s interest payments may be higher or lower than the bond s coupon rate.

This is the effective return called yield to maturity. Investopedia uses cookies to provide you with a great user experience. By using Investopedia, you accept our. Your Money. Personal Finance. Financial Advice. Popular Courses. Login Advisor Login Newsletters. What is a Coupon Rate A coupon rate is the yield paid by a fixed-income security; a fixed-income security s coupon rate is simply just the annual coupon payments paid by the issuer relative to the bond s face or par value. Compare Popular Online Brokers.

The offers that appear in this table are from partnerships from which Investopedia receives compensation. Related Terms Coupon Bond A coupon bond is a debt obligation with coupons attached that represent semiannual interest payments, also known as a "bearer bond. Gross Coupon A gross coupon is the annual interest rate received from a mortgage-backed security or other mortgage pool security.

Coupon A coupon is the annual interest rate paid on a bond, expressed as a percentage of the face value, also referred to as the "coupon rate. Current Coupon A current coupon refers to a security that is trading closest to its par value without going over par. A bond has a current coupon status if its coupon is set approximately equal to the bonds yield to maturity YTM at the time of issuance. It is the annualized yield on a zero-coupon bond when calculated as if it paid a coupon.

Closed-End Indenture A closed-end indenture is a term in a bond contract which guarantees that the collateral used to back the bond is not backing another bond. Partner Links. Related Articles. Coupon Rate: What s the Difference?

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Bonds are a kind of debt instrument that offer investors a method of seeing a secure, predictable return. The amount of each coupon payment depends on the terms of the bond, and knowing how to calculate a coupon payment is a matter of performing a simple calculation. To calculate a coupon payment, multiply the value of the bond by the coupon rate to find out the total annual payment. Alternatively, if your broker told you what the bond yield is, you can multiply this figure by the amount you paid for the bond to work out the annual payment. To calculate the actual coupon payment, divide the annual payment by the frequency of the payment, meaning you would divide it by 2 for semi-annual payments.

A coupon is the annual interest rate paid on a bond, expressed as a percentage of the face value.

Bonds can prove extremely helpful to anyone concerned about capital preservation and income generation. Bonds also may help partially offset the risk that comes with equity investing and often are recommended as part of a diversified portfolio. They can be used to accomplish a variety of investment objectives. These concepts are important to grasp whether you are investing in individual bonds or bond funds.

### Coupon (bond)

The Central Bank auctions Treasury bonds on a monthly basis, but offers a variety of bonds throughout the year, so prospective investors should regularly check for upcoming auctions. Most Treasury bonds in Kenya are fixed rate, meaning that the interest rate determined at auction is locked in for the entire life of the bond. This makes Treasury bonds a predictable, long-term source of income. The National Treasury also occasionally issues tax-exempt infrastructure bonds, a very attractive investment. Individuals and corporate bodies can invest in Treasury bonds as a nominee of a commercial bank or investment bank in Kenya, but if you hold a bank account with a local commercial bank you can also invest directly through the Central Bank and avoid additional fees.

### Glossary of Bond Terms

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### Treasury Bonds

Treasury bonds pay a fixed interest rate on a semi-annual basis. This interest is exempt from state and local taxes. Treasury bonds are government securities that have a year term. They earn interest until maturity and the owner is also paid a par amount, or the principal, when the Treasury bond matures. They are marketable securities, so they can be sold before maturity — unlike U. You can buy Treasury bonds directly and electronically from TreasuryDirect through non-competitive bidding. T-bonds are also bought through banks, brokers or dealers by either a competitive or non-competitive bid.

## When is a bond s coupon rate and yield to maturity the same?

A bond s coupon rate is equal to its yield to maturity if its purchase price is equal to its par value. The par value of a bond is its face value, or the stated value of the bond at the time of issuance, as determined by the issuing entity. Read more What is the difference between yield to maturity and the coupon rate? The par value of a bond does not dictate its market price , however. These factors include the bond s coupon rate, maturity date, prevailing interest rates and the availability of more lucrative bonds. The coupon rate of a bond is its interest rate , or the amount of money it pays the bondholder each year, expressed as a percentage of its par value. Suppose you purchase an IBM Corp. To calculate the bond s coupon rate, divide the total annual interest payments by the face value. A bond s maturity date is simply the date on which the bondholder receives repayment for his investment.

### Zero-Coupon Bond

When you buy a bond, either directly or through a mutual fund, you re lending money to the bond s issuer, who promises to pay you back the principal or par value when the loan is due on the bond s maturity date. In the meantime, the issuer also promises to pay you periodic interest payments to compensate you for the use of your money. The rate at which the issuer pays you—the bond s stated interest rate or coupon rate—is generally fixed at issuance. An inverse relationship When new bonds are issued, they typically carry coupon rates at or close to the prevailing market interest rate. Interest rates and bond prices have an inverse relationship; so when one goes up, the other goes down. The question is: How does the prevailing market interest rate affect the value of a bond you already own or a bond you want to buy from or sell to someone else? The answer lies in the concept of opportunity cost. Investors constantly compare the returns on their current investments to what they could get elsewhere in the market. As market interest rates change, a bond s coupon rate—which, remember, is fixed—becomes more or less attractive to investors, who are therefore willing to pay more or less for the bond itself.

There s actually an interesting story behind the terminology employed; why the phrase "bond coupon" has survived into the 21st century. In the days before computers automated and simplified much of the financial world, investors who bought bonds were given physical, engraved certificates; beautiful works of art that often involved commissioning talented engravers and artists to incorporate aspects of the firm s history or operations into the imagery.

### What is a bond?

A zero-coupon bond is a bond that makes no periodic interest payments and is sold at a deep discount from face value. The buyer of the bond receives a return by the gradual appreciation of the security, which is redeemed at face value on a specified maturity date. The price of a zero-coupon bond can be calculated by using the following formula: You would receive "interest" via the gradual appreciation of the security. The greater the length until a zero-coupon bond s maturity, the less the investor generally pays for it. Zero-coupon bonds are very common, and most trade on the major exchanges. Corporations, state and local governments, and even the U. Treasury issue zero-coupon bonds. Corporate zero-coupon bonds tend to be riskier than similar coupon-paying bonds because if the issuer defaults on a zero-coupon bond, the investor has not even received coupon payments -- there is more to lose. For tax purposes, the IRS maintains that the holder of a zero-coupon bond owes income tax on the ir that has accrued each year, even though the bondholder does not actually receive the cash until maturity. The IRS calls this imputed interest. Zero-coupon bonds are usually long-term investments ; they often mature in ten or more years. Although the lack of current income provided by zero-coupons bond discourages some investors, others find the securities ideal for meeting long-range financial goals like college tuition. The deep discount helps the investor grow a small amount of money into a sizeable sum over several years. Because zero-coupon bonds essentially lock the investor into a guaranteed reinvestment rate , purchasing zero-coupon bonds can be most advantageous when interest rates are high.

Important legal information about the email you will be sending. By using this service, you agree to input your real email address and only send it to people you know. It is a violation of law in some jurisdictions to falsely identify yourself in an email. All information you provide will be used by Fidelity solely for the purpose of sending the email on your behalf. The subject line of the email you send will be "Fidelity. A bond is essentially a loan an investor makes to the bonds issuer.

A coupon payment on a bond is the annual interest payment that the bondholder receives from the bond s issue date until it matures. Coupons are normally described in terms of the coupon rate , which is calculated by adding the sum of coupons paid per year and dividing it by the bond s face value. The origin of the term "coupon" is that bonds were historically issued in the form of bearer certificates. Physical possession of the certificate was proof of ownership. Several coupons, one for each scheduled interest payment, were printed on the certificate. At the date the coupon was due, the owner would detach the coupon and present it for payment an act called "clipping the coupon". The certificate often also contained a document called a talon , which when the original block of coupons had been used up could be detached and presented in exchange for a block of further coupons. Not all bonds have coupons. Such bonds make only one payment: Normally, to compensate the bondholder for the time value of money , the price of a zero-coupon bond will always be less than its face value on any date before the maturity date.

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