Legal Definitions - coupon security

A coupon security is a type of debt instrument, most commonly a bond, that historically featured physical, detachable coupons. Each coupon represented a scheduled interest payment. To receive an interest payment, the holder of the security would detach the appropriate coupon and present it to the issuer or their designated agent on the payment due date. This method allowed investors to collect interest without having to surrender the principal security itself until maturity. While most modern bonds are now held electronically and interest payments are made directly, the term "coupon" is still widely used in finance to refer to the interest rate paid on a bond.

• Example 1: In the 1960s, a retired schoolteacher invested her savings in a municipal bond issued by her city. The bond certificate she received had a series of small, perforated coupons attached along the bottom edge. Every six months, she would carefully cut off the next coupon and take it to her local bank, which would then process it and credit her account with the interest payment.

  Explanation: This illustrates a classic coupon security where the investor physically detaches a coupon and presents it to receive a periodic interest payment, without needing to turn in the main bond certificate.

• Example 2: A historical society acquires an original corporate bond certificate from a railway company dating back to the early 20th century. The certificate is beautifully engraved and includes a full sheet of unclipped coupons, each marked with a specific date and interest amount. Although the bond is no longer active, its physical form clearly demonstrates it was once a coupon security.

  Explanation: This example highlights the physical characteristic of a coupon security, where the presence of detachable coupons on the certificate itself is the defining feature, even if the security is now a historical artifact rather than an active investment.

• Example 3: Before the widespread adoption of electronic record-keeping, a large pension fund would purchase significant amounts of government bonds. These bonds were often issued as physical certificates with numerous coupons. The fund's administrative staff had a dedicated process for clipping the due coupons from these certificates on specific dates and submitting them to the Treasury department to ensure the fund received its regular interest income for its beneficiaries.

  Explanation: This shows how even large institutional investors managed coupon securities in the past, relying on the physical detachment and submission of coupons to collect interest payments on their bond holdings.