Coupon bonds - what is it?

When you invest in the stock market, you take risks. It may turn out that the stock market will turn you into a real investor or your adventure will end before it actually began. There are many securities on the market. They also include bonds. We can list a dozen or so bonds alone, taking into account various classification criteria. One of the most popular bonds are coupon bonds. They are considered among the safest bonds on the market. What are coupon bonds? Are they worth investing in? Can coupon bonds really protect us from capital loss?

What are bonds?

To explain exactly what coupon bonds are, we first need to understand what bonds themselves are. Well, in the simplest sense, bonds are a type of securities that are debt securities. What does it mean? We are dealing with bonds when the issuer, that is, the person issuing the securities, borrows from the bondholder. In connection with the loan taken, he undertakes to repay the debt at the end of the term, together with interest, which is a profit for the depositor. The interest rate on this type of loan depends primarily on the financial reliability of the issuer and the risk incurred. The main difference between bonds and stocks is that bonds do not carry any rights with respect to the issuer.

What are the types of bonds?

It is worth noting that there are several types of bonds, including coupon bonds. The gap depends on several factors. There is a division according to the type of issuer, maturity, name of the bondholder, nominal value, place of nomination, sale price, additional options, reliability of fulfillment of obligations, ensuring the interests of bondholders and interest rate.

Each of these factors divides individual bonds into types:

• Issuer breakdown:

  • treasury - including wholesale and retail

  • municipal

  • legal entities

• Timeline breakdown:

  • long-term - over five years

  • medium-term - from one to five years

  • short-term - up to a year

  • eternal - consoles

  • amortized - no predetermined maturity date

• Subdivision by the name of the bondholder:

  • bearer

  • registered

• Breakdown by face value:

  • zero coupon

  • coupon

• Breakdown by bond position ratio:

  • foreign

  • domesticated

  • Eurobonds

• Breakdown by sales value factor:

  • discounters

  • at a premium

  • at nominal price

• Breakdown by additional options factor:

  • saving

  • structured

  • called

  • pupillary

  • spare

  • income

• Separation by the coefficient of reliability of fulfillment of obligations:

  • high risk

  • low risk - high certainty

• Separation by the factor of ensuring the interests of bondholders:

  • partially secured

  • unsecured

  • secured

• Interest rate breakdown:

  • indexed

  • zero coupon

  • with a fixed interest rate

  • with a variable interest rate

What are coupon bonds?

Coupon bonds are a type of nominal bonds. This means that coupon bonds are redeemed at face value. They guarantee the owner a stable income for a predetermined period. Therefore, the principle of their work can be compared with a bank deposit. However, it should be noted that we are talking about coupon bonds when the issue price is equal to the nominal price, and the interest rate corresponds to the investment risk assessment, i.e. issuer’s insolvency.

Coupon bonds are one of the most popular bonds among investors. One of the reasons is that they provide stable interest income on agreed terms throughout the life of the investment. At the same time, upon the expiration of its term, the investor restores his capital in the state in which he contributed it at the beginning.

Types of coupon bonds

However, in order not to be too simple, coupon bonds can also be divided into types. In this case, we are talking, among other things, about the division into the investment period or the method of paying interest.

In coupon bonds, we can distinguish them because of:

• maturity:

  • long-term - redemption after more than 12 years

  • medium-term - repayment between the 5th and 12th year

  • short-term - repayment between the 1st and 5th years

• percentage method:

  • variable interest rate

  • fixed interest rate

• interest payment frequency:

  • monthly

  • quarterly

  • semiannually

  • annually

• coupon type:

  • variable coupon - the amount of interest depends on the factors of the issue conditions

  • fixed coupon - interest is determined in advance and its size does not change during the entire issue period

  • periodically adjusted coupon - interest changes after a predetermined date, for example, after 5 years

Advantages of coupon bonds

It is worth noting that coupon bonds have a number of advantages, in which one of them is in the lead - a stable profit over a certain period of time. It is a way of earning and a permanent source of income. Many investors value this element most in coupon bonds. And the profit comes without much difficulty. It is good enough to place your bonds so that you can use the interest without paying much attention to it. This type of bond is also considered one of the safest ways to invest. Because the invested capital is paid out at maturity, it is also a great option for keeping your savings.