Coupon in Bond Market
The word coupon is very widely used or may be the most used word when we talk of the bond market. In layman terms, coupon refers to the return that one gets out of investing in bonds.
For example if one has got Rs.50 in a year by investing Rs.1000, then the coupon of that particular bond is 5%. So, the annual return percentage is referred to as the coupon of that bond.
Zero Coupon Bonds
Some Bonds are sold at zero coupon, this however does not imply that one would get no return in investing in such Bonds. This type of Bonds is sold at a discount and the face value of the Bond is redeemed on maturity. A special type of zero coupon bond is the deep discount bond. In such cases the selling value of the bond is much lower than the face value but the maturity period is very high.
In the above cases, the returns that one would get by investing in a bond are known to the investor. There are also bonds which are floating coupon bonds. In these type of bonds, the coupon is proportional to a certain benchmark that its following. In this case, the actual return cannot be determined beforehand.
