Coupons are the interest payments a holder of a bond receives and the issuer of a bond pays. To a large group of investors, coupon income is the main reason for purchasing a certain bond.
Bonds are said to be a fixed income instrument, meaning coupon rates are fixed and coupons are paid following a series of pre-set fixed dates. Coupons can take various types and are explained below.
|Fixed||The fixed interest rate paid on a bond during the life of the bond. The coupon rate is usually annualised and paid in semi-annual or quarterly terms.||A semi-annual coupon paying bond paying a coupon rate of 8% per annum divided over two semi-annual 4% payments.|
|Floating||The interest rate paid on a bond that will change each coupon date. A percentage is added to a benchmark rate, such as SOFR.||A bond paying a coupon of SOFR + 2.5%. The SOFR rate on the coupon date will be used to determine to final coupon for that payment.|
|Variable||A bond paying a fixed coupon rate until a certain date and then switching to a floating coupon rate.||A 7-year bond paying a 5% coupon rate for 5 years and SOFR+4.5% for 2 years thereafter.|
|Step Up||A bond paying a higher coupon rate after a certain date has passed.||A 7-year bond paying a 5% coupon rate for 5 years and 5.5% for two years thereafter.|
|Flat Trading||A bond that has stopped paying the coupon. This usually happens when the bond issuer is in a state of stress/default.||A 7-year year bond that stopped paying the fixed 5% coupon rate due to default.|
|Zero Coupon||A bond that pays no coupon. The holder usually pays a discounted cash price (less than 100%) to acquire the bond and receives the full 100% back at maturity.||A bond purchased at 90% with a redemption of 100% at maturity in 2 years.|
|Pay-In-Kind||Like dividend payments, Pay-In-Kind bonds may pay the coupon in the form of more bonds instead of (or on top of) cash.||An investor owning $100,000 of a bond receives a 3% cash coupon and 2% PIK interest. The PIK interest comes in the form of extra principal and new holding will be $102,000 after the coupon payment.|
Bonds are said to be a fixed-income instrument, mainly referring to the fixed schedule when coupon payments are due.
At the time of issuance, the issuer sets the coupon payment schedule for the bond. Most commonly, coupons are paid annually, semi-annually, quarterly or monthly. This is generally known as the “coupon frequency”.
The amount of coupon income an investor receives is subject to the coupon rate, the coupon payment frequency and the nominal holding in a bond.
As an illustration, the coupon payment schedule for the November 2025 Republic of Nigeria Eurobond is presented below.
The bond in the above payment schedule was issued on November 21st 2018 with the first coupon due on May 21st 2019. The bond has a coupon frequency of 2, i.e. semi-annually, and pays a 7.625% coupon. The schedule is based on a nominal holding of $1,000,000 and assumes the investor holds the Eurobond until the maturity date. Please note that the 7.625% coupon is divided over two equal payments every 180 days. The coupon income to be received on each coupon date is calculated as:
(Coupon Rate / Coupon Payment Frequency) x Nominal Holding.
In this case it is (7.625% / 2) x $1,000,000 = $38,125.00.
Coupon Schedules for all Nigerian Eurobonds can be found and computed in Coupon Schedules section on the HowNoww website.
As we have seen, the fixed component for Eurobonds is not necessarily the coupon rate, but it is the fixed dates on which coupons are paid.
The fixed coupon schedule helps investors to plan. One can imagine, that when using a fixed coupon date schedule, some of the coupons may fall in weekends or on public holidays during the life of the bond.
Public holidays relate to the currency the Eurobond is issued in. For example, coupon and principal payments for a Eurobond issued in USD will not be paid on US public holidays. The same is true for a Eurobond issued in Japanese Yen on Japanese holidays.
When a coupon date or maturity date falls in a weekend or on a public holiday, the payment is processed on the next business day.
Settling bonds on weekends or public holidays is almost always avoided, as market participants normally decide on the trade date not to settle the bonds in the weekend or on a public holiday.
In theory, a coupon payment is transferred to the bondholder on the coupon date. In practice, coupon payments are processed by paying agents or processing agents on the coupon date after funding has been received from the issuer. Possible delays are mainly subject to the processing speed or (system) efficiency of paying agents. It is not uncommon for investors to wait a couple of business days before seeing the coupon amount credited to their account.
Besides the efficiency of a paying agent, the prospectus may allow for payment flexibility regarding coupon payment dates. Also, if bonds are registered bonds instead of bearer bonds, the paying agent may require more time to trace all bondholders before payments can be processed.
Coupon payments related to bond trades that settle on or around coupon dates may be subject to delays too. The buyer of a bond whose settlement date falls on the coupon date will not pay accrued interest and the full coupon will go to the seller. Settlements dates, not trade dates, determine to who the coupon gets paid to. If the settlement date is prior or post the coupon date, the buyer pays the seller accrued interest.
Nevertheless, it may occur that the coupon is paid to the buyer instead or held in a so-called “suspense account” at the International Central Security Depository (ICSD). The seller will have to claim the coupon either directly from the seller or the ICSD credits the coupon to the buyer within a few business days once a claim has been made.
Finally, an investor purchasing shares on or after the ex-dividend date is not eligible to receive the dividend on those shares. The same concept can apply to bonds; however, most bonds do not have a so-called “ex-coupon date” or “record date”. For Eurobonds settling cum-coupon after the ex-date, International Central Securities Depositories (ICSDs) may withhold the coupon portion. In such events, the ICSD, or the buyer itself, may claim the coupon from the seller. This may result in a delay in receiving the coupon.
Regrettably, it is common that investors are not aware of record dates due to the lack of transparency provided by International Central Securities Depositories (ICSDs) or complexity of prospectuses.
Unlike stock prices, who usually reprice after a dividend is paid, bond prices do not drop after a coupon is paid.
The payment of the coupon is expected and therefore priced in the cash price through "accrued interest". Dividend payments are at the discretion of the company and therefore do not present an obligation. Not paying the coupon is an event of default.
When a Eurobond is issued with a semi-annual coupon payment frequency, but the first coupon is more than 6 months from the first settlement date of the bond, this is generally referred to as a "long" coupon. A "short" coupon is generally the opposite. The same logic as for a "long/short" coupon payment can be used for bonds with a monthly, quarterly or annually coupon frequency.
A "short" coupon, i.e. a coupon is paid before the set coupon date according to the coupon payment schedule, is usually the last coupon in the payment schedule and is said to be paid "early" to match the maturity date of the bond.
A long or short coupon is usually the result of the relationship between the timing of the issuance and the cash liquidity management of the issuer.
Let's use an example to illustrate a long/short coupon payment. Say, an issuer has recurring revenues for the months of April and October. To easily cross revenues with expenses, it wishes to make sure that coupon payments on its borrowings fall in these months. Although a common liquidity management strategy, it assumes that the coupon dates align with the months when revenue is recorded. In other words, the issuer ideally wants issue a Eurobond in April with semi-annual coupon payments every April and November.
In reality, the timing of issuance may dictate a different issue date and therefore coupon payment schedule. For example, although the issuer ideally issues a Eurobond in April, market conditions may already be favourable in March. To avoid the fear of missing out, the issuer may therefore wish to lock-in an attractive issue yield a month before it had planned to do.
This "mismatch" between the date of issuance and cash liquidity management can be corrected by an issuance in March, but with a semi-annual coupon payment schedule of April and October.
The first coupon conflicts with the semi-annual nature of the coupon payment frequency and will not be paid 1 month after issuance in April nor 6 months after issuance in September. A longer period of 7 months passes before the first coupon is paid in November to adhere to the set coupon payment schedule.
The below Eurobond was issued on 07 March 2021, has a semi-annual coupon payment frequency and expires on 15 March 2023.
|Issue Date||07 March 2021|
|Maturity Date||15 March 2023|
|First Settlement Date||15 March 2021|
To match the coupon payment with the cash liquidity of the issuer, the below coupon payment dates have been set. The first coupon payment is the "long" coupon, whereas the last payment is the "short" coupon.
|First Coupon Date||15 October 2021||7 Months|
|Second Coupon Date||15 April 2022||6 Months|
|Third Coupon Date||15 October 2022||6 Months|
|Fourth/Final Coupon Date||15 March 2023||5 Months|