Also known as a “bearer bond,” a coupon bond is a fixed-income investment owned by the person holding the bond rather than a registered owner. Similar to registered bonds, bearer bonds are financial instruments with stated maturity dates and coupon interest rates. The coupon or coupon rate refers to the stated interest rate on the bond at the time of purchase.
These investments are called coupon bonds because some actually have coupons that people tear off and redeem for interest payments. Typically, such bonds specify whether you can collect interest payments monthly, quarterly, semiannually, or annually. For example, if you purchase a $1,000 bond with a coupon of 5 percent, you will receive $50 a year in interest payments from your initial investment; however, if you buy a $1,000 bond with a 10 percent coupon, you will receive $100 per year.
Zero coupon bonds, on the other hand, are investments that do not pay interest during the life of the bond. People typically buy a zero coupon bond at a discount compared to what the investment will be worth once it matures. Generally, zero coupon bonds are held for longer periods of time—such as ten, fifteen, or twenty years—than other coupon bonds. When the zero coupon bond comes due, the investor then receives a lump sum that is equivalent to the original investment plus interest accrued over the life of the bond.
Overall, coupon bonds are less popular than they used to be for the simple fact that holders of such bonds do not have any real protection or recourse in the event of theft. Since an increasing number of records are maintained electronically, physical bonds are also becoming less common. You can read more about zero coupon bonds at the SEC website: http://www.sec.gov/answers/zero.htm.
