Legal Definitions - coupon

In finance, a coupon historically referred to a physical, detachable certificate attached to certain investment instruments, most commonly bonds. Each coupon represented a specific interest payment or dividend that was due on a particular date and for a predetermined amount. The owner of the instrument would detach the relevant coupon and present it to receive the payment.

• Example 1: Government Bond Interest Payment

  Imagine an investor in the early 20th century purchased a long-term government bond. This bond certificate would have a series of small, perforated sections along its edge, each labeled with a specific date and a monetary value. For instance, one section might read "Pay $75 on July 1, 1935." On or after that date, the bondholder would physically cut off this particular section – the coupon – and present it to a bank or the government's treasury department to collect the $75 interest payment. This illustrates how the coupon served as a certificate for a definite sum payable at a specified time, detachable from the main bond instrument.

• Example 2: Corporate Bond Dividend

  Consider a scenario in the mid-20th century where a railway company issued bonds to fund its expansion. An individual who bought one of these bonds would receive a certificate with numerous coupons attached. Each coupon specified a dividend payment, perhaps stating "Dividend of $100 payable on October 15, 1950." When October 15th arrived, the bondholder would carefully detach that specific coupon and submit it to the railway company's financial agent to receive their $100 dividend. This demonstrates the coupon as a separate certificate for a scheduled payment, originally part of a larger financial instrument.