Types of Bond Coupon

There are different types of bond coupon; here are some examined.

The first of these is known as the Zero Coupon, and this is where there is no appreciable dividend at all - these get sold at a discount of course in order to still make them attractive to purchase.

There are usually particular tax regimes that apply to these types of discounted bonds too.

There are also the option of having bonds that don't have a fixed coupon and so these are referred to as stepped coupon bonds.

This will rise over the lifetime of the bond, so for instance might be 3% in year 1, and then 5% in year two and so on, perhaps going to around 10% in year 4 or 5.

The plus side here for the issuer is they don't need to pay the full interest cost at the start, though of course overall the issuer pays a higher coupon rate so it is swings and roundabouts.

The opposite also applies and so the stepped rate can start high and decrease though this is less common.

More features of bonds to consider
Bond terminology: Maturity
Bond Credit Ratings Explained
The Gross Redemption Yield
Spot Rate and Bonds

Types of Bond Coupon

Related Articles