Legal Definitions - interest coupon

An interest coupon historically referred to a detachable part of a physical bond certificate that entitled the bondholder to receive a specific interest payment on a predetermined date. Each coupon represented a scheduled interest payment. While most bonds today are electronic and do not involve physical coupons, the term conceptually refers to the periodic interest payments made to bondholders.

Here are some examples to illustrate the concept of an interest coupon:

• Example 1 (Historical Context): Decades ago, a retired schoolteacher invested in a municipal bond to help fund a new library. The bond certificate she received had a series of small, perforated slips attached to it, each marked with a date and an amount. Every six months, she would carefully cut off the next slip, which was an interest coupon, and present it to her bank to receive her semi-annual interest payment. This physical act of "clipping" and redeeming the coupon was how she collected her earnings.

  Explanation: This example demonstrates the original, physical manifestation of an interest coupon, where it was a tangible piece of paper exchanged for an interest payment.

• Example 2 (Modern Conceptual Use): A large technology company issues new corporate bonds to raise capital. These bonds are entirely digital, traded electronically, and no physical certificates are issued. However, the company's financial reports and investor presentations still refer to the "coupon rate" of 4% and the "coupon payments" that will be made quarterly to bondholders. While no physical coupons exist, the term is used to describe the regular, scheduled interest disbursements.

  Explanation: Here, "interest coupon" is used conceptually to describe the regular, scheduled interest payments on a modern, electronic bond, even though there are no physical coupons to detach.

• Example 3 (Government Securities): An individual purchases a U.S. Treasury bond through an online brokerage account. The bond promises to pay interest every six months. On the payment dates, the interest is automatically deposited into the investor's linked bank account. These regular direct deposits are the modern equivalent of what was historically collected by presenting a physical interest coupon, representing the periodic return on their investment.

  Explanation: This illustrates how the concept of an interest coupon persists in government securities, with electronic payments replacing the physical coupons as the mechanism for delivering scheduled interest to investors.