Cum Coupon
What Is Cum Coupon?
The term "cum coupon" is utilized in the secondary market for bonds, which is the market wherein investors buy and sell bonds from each other rather than buying those bonds straightforwardly from the issuer. It means that the bond being purchased will incorporate the current coupon payment as part of the purchase price. Conversely, a bond trading ex-coupon wo exclude the current coupon payment.
Since bonds trading cum coupon permit the new owner to collect an extra interest payment soon, cum coupon bonds generally command a higher price than those sold on an ex-coupon basis.
Grasping Cum Coupon
In the United States, cum coupon is the run of the mill method for pricing bonds in the secondary market. In Europe, be that as it may, most bonds are priced on an ex-coupon basis. This qualification is important for investors to know about, so they don't incidentally overpay for a bond. An investor hailing from a country that involves the cum coupon convention for pricing bonds could coincidentally overpay for a bond since they inaccurately expect they will receive the impending interest payment.
Bond Valuation
While esteeming bonds, the price paid will be determined by several factors. These incorporate the creditworthiness of the borrower, the opportunity cost introduced by alternative investments, the timing of the next coupon payment, and the size of that coupon relative to market interest rates.
All else being equivalent, bond prices move conversely to interest rates, meaning a given bond will see its price rise as rates decline or fall as rates increase. Moreover, investors will generally pay a premium for bonds issued by financially sound companies.
Prices will likewise be impacted by how long remaining parts until the next coupon payment is due. Due to the time value of money, investors will pay somewhat something else for a bond that is nearer to its next coupon payment, given that bond trades on a cum coupon basis.
While selling bonds, the original issuer will give a prospectus indicating the bond's maturity date and payment schedule, which might include coupon payments on an annual, semi-annual, quarterly, or even month to month basis.
Example of Cum Coupon
To delineate cum coupon, consider a theoretical 10-year bond with a face value of $10,000. The bond conveys a 4% coupon and is issued on January 1. Assuming the payment schedule is quarterly, there would be 40 coupons connected to the bond over of its 10-year term. In spite of the fact that interest consistently gathers, the principal quarterly coupon would be paid on April 1, the second would be paid on June 1, etc.
Assuming one of these bonds is sold on the secondary market between April 1 and June 1, then, at that point, the price would be adjusted relying upon whether the new buyer receives payment for that June 1 coupon. Assuming that they do, the bond would trade cum coupon. The extent of the price adjustment would rely upon factors, for example, the market rates of interest at that point, and the overall supply and demand situation for comparable bonds in the marketplace.
Features
- Cum coupon alludes to the practice of selling a bond by which the new buyer is qualified for the impending coupon payment.
- Ex-coupon, in which the new buyer isn't qualified for the impending coupon payment, is something contrary to cum coupon.
- Cum coupon is the conventional approach to providing bond cost estimates in the United States, while ex-coupon is the conventional way in Europe.
- Both cum coupon and ex-coupon allude to bonds sold in the secondary market.
