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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.
What Is a Zero-Coupon Bond? - TheStreet Definition
Your Money. Personal Finance. Financial Advice. Popular Courses. Login Advisor Login Newsletters. 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. During the European sovereign-debt crisis , some zero-coupon sovereign bonds traded above their face value as investors were willing to pay a premium for the perceived safe-haven status these investments hold.
Before you buy a bond, always check to see if the bond has a call provision, and consider how that might impact your portfolio investment. A bond is a long-term investment. Bond purchases should be made in line with your financial goals and planning. If you sell a bond before it matures or buy a bond in the secondary market, you most likely will catch the bond between coupon payment dates.
The buyer compensates you for this portion of the coupon interest, which generally is handled by adding the amount to the contract price of the bond. As the name suggests, these are bonds that pay no coupon or interest. Instead of getting an interest payment, you buy the bond at a discount from the face value of the bond, and you are paid the face amount when the bond matures. A bond rating agency assesses the financial strength of a company or government agency and its ability to meet debt payment obligations, then assigns it a grade that reflects the level of confidence an investor should have in that company or government agency.
What it is:
Bonds receive a graded rating that reflects the risk associated with investing in a bond. The A and BBB rated bonds are considered medium credit quality and anything below that is considered low quality or, what some investors refer to as junk bonds. Morningstar has grown in status recently and could be considered the fourth primary rating agency. If the corporation or government agency that issued the bond goes bankrupt, it sells all its assets and pays back investors in a pre-determined order known as liquidation preference.
The typical order is to start with senior debtors, which usually are bondholders and banks. When senior debtors are paid, if there is money left over, it goes to the next category of investors, know as junior or subordinated debtors.
These generally are large corporations or business entities. A bond unit investment trust is a fixed portfolio of bond investments that are not traded, but rather held to maturity for a specified amount of time. The length of time to maturity is set when the trust is formed and at the end of that, the investor receives his principal back, just as he would if investing in a single bond.
Along the way, investors receive interest payments, typically on a monthly basis. This is considered a low-risk investment, though the fees associated with it can eat into the profits. The bond unit investment trusts operate much like a mutual fund in the sense that you are investing in a large group of bonds and not just one.