Definition: A coupon bond is a debt instrument that has detachable slips of paper that can be removed from the bond contract itself and brought to a bank or broker for interest payments. These detachable slips of paper are called coupons and represent the interest payments due to the bondholder. Each coupon has its maturity date printed on it. When a coupon matures, the bondholder can bring it to a bank or broker and collect the interest payment.
What Does Coupon Bond Mean?
Thorough the life of the bond, the bondholder detaches the interest coupons one-by-one on the interest dates. For example, a 5-year bond that pays interest monthly would have 60 coupons attached to the actual bond certificate. As the five years passes, the bond coupons are removed and presented for payment.
At the end of the bond life, none of the coupons will remain and the bond certificate can be turned in to the bank or broker to collect the face value of the bond.
Coupon bonds are slightly different than traditional bonds because the interest paid to bondholders is not deductible for income tax purposes by the issuer. The IRS realizes that some bondholders might not turn in their interest slips or claim them as income on their personal returns. Thus, they don’t let the issuing company deduct this as an expense on the company tax return.
Also, coupon bonds are often bearer bonds. This means that there is no registered owner listed on the bond. Just like cash, the owner of the physical certificate is the legal owner of the bond. Issuers don’t keep records of the original owners and bondholders are not protected against theft. Anyone who has possession of the certificate can turn in the coupons and demand payment from the bank or broker.
Since most bonds are not physically printed and the actual bondholder never even sees the bond certificate, physical coupon bonds are less common today.