Series 52: 1.4.3. By Form Of Payment

1.4.3. By Form of Payment

Coupon Bonds. The most common method by which bonds pay investors is with semiannual interest payments, also called coupon payments, each of which is equal to half of the coupon rate times the par value. It is important to realize that even though coupon bonds pay lump sums every six month, the interest is not earned in lump sums. A coupon bond that paid out 37 days ago has accrued 37 days’ worth of interest, which belongs to the bondholder. Accrued interest is interest that has been earned but not yet been paid. Accrued interest is discussed in more detail later.

Original Issue Discount (OID) Bonds. These are bonds that are sold new by the issuer at a discount to the face value. A discount given by an issuer on a new bond is called an original issue discount (OID). When a bond is sold at an OID, the face value still represents the amount that will be paid at maturity. Effectively, the discount b