CP in the context of bonds typically refers to "Coupon Payment".
A coupon payment is a periodic interest payment that bondholders receive from the bond issuer. This payment is typically made at regular intervals, such as semi-annually or annually, and is calculated based on the bond's coupon rate.
Understanding Coupon Payments
- Coupon Rate: This is the annual interest rate stated on the bond certificate.
- Coupon Payment: The actual amount of interest paid to the bondholder at each payment interval.
- Par Value: The face value of the bond, which is the amount the issuer will pay back to the bondholder at maturity.
Example:
Imagine a bond with a par value of $1,000 and a coupon rate of 5%. If the bond makes semi-annual payments, the coupon payment would be:
- *Coupon Payment = (Coupon Rate / 2) Par Value**
- *Coupon Payment = (5% / 2) $1,000 = $25**
The bondholder would receive $25 every six months.
Key Points
- Coupon payments are a key component of bond returns.
- The coupon rate influences the bond's yield, which is the total return an investor can expect.
- Coupon payments are typically fixed, but can be variable in some cases.
- Bonds without coupon payments are called zero-coupon bonds.
