Ex-Coupon
What Is Ex-Coupon?
Ex-coupon is a bond or preferred stock that does exclude the interest payment or dividend when purchased or sold. A bond that is ex coupon is sold or bought with the information that the investor won't receive the next coupon payment from the bond. The lack of interest payments ought to be considered while purchasing the bond and discounted in like manner.
Ex-coupon is likewise alluded to as ex-interest, and can measure up to a stock that is trading ex-dividend.
Figuring out Ex-Coupon
The period when coupon payments are made to bondholders is revealed in the bond indenture at the hour of issuance. A few bonds pay interest payments yearly, others do so semi-yearly, quarterly, or month to month. The coupon interest is paid to the bondholder of record. In the event that an investor purchases a bond at some point between the last coupon payment and the next coupon payment, s/he will receive the interest as s/he will be the bondholder of record. The amount of interest over this period that will be credited to the buyer is called the accrued interest.
Nonetheless, since the buyer doesn't earn all of the interest accrued over this period, s/he must pay the bond seller the portion of the interest that the seller earned before selling the bond.
Ex-Coupon Date
The ex-coupon date can be defined as the date by which the trade must happen on the off chance that the buyer is to receive the impending coupon. The ex-coupon date is the main day the bond begins trading without the coupon connected to it. On the off chance that the debt security is purchased on or after the ex-coupon date, the seller holds the right to receive the next due interest payment, and no coupon is incorporated with the bond. Subsequently, the investor must buy or sell the asset before the ex-coupon date to get it with a coupon linked to it.
Example of Ex-Coupon
For example, expect a bond has a fixed coupon that will be paid semi-yearly on June 1 and December 1 consistently. On the off chance that a bondholder sells this bond on October 1, the buyer receives the coupon payment on the next scheduled coupon date, December 1. In this case, the buyer must pay the seller the interest accrued from June 1 to October 1. This interest is embedded in the purchase price of the bond.
Ex-Coupon versus Cum-Coupon
The purchase price of the bond can take two forms - cum-coupon and ex-coupon. In the United States, bonds generally trade cum-coupon, or at least, with coupon. The price for a bond trading cum-coupon is alluded to as the full or dirty price, which is the agreed purchase price plus accrued interest.
Some bond markets outside of the U.S. trade ex-coupon that is, without the coupon. Buyers of these bonds just pay the agreed purchase price for the bond (the clean price) and forego the next coupon payment. The seller gathers and keeps the next interest due after the sale since s/he is registered as the holder of the bond on that date. Nonetheless, since the buyer will claim the bond during a small part of the coupon period, the seller must pay him the interest that builds during that concise period.
Features
- Ex-coupon alludes to a fixed-income security that is trading without anticipated interest or coupon payments.
- Thus, ex-coupon bonds are sold at a discount to compensate for the missed cash flows.
- Most bonds in the U.S. trade cum-coupon and are quoted with a "dirty price", while bond markets in Europe customarily trade ex-coupon with a "clean price" quote.
