Client Question: Clipping Coupons

February 29, 2024

I fully appreciate how much industry jargon there is in the financial world, so I do my best to not use it. Finances are confusing enough in plain English right?! However, when talking to a client this week, I accidentally used a jargon phrase and was asked to stop and clarify. The phrase was “clipping coupons.” Let’s recap what that means in the financial world (not in the grocery store ha!)

The term “clipping coupons” relates to fixed income securities (also known as bonds). To recap – these financial assets represent a lending/borrowing arrangement. The investor lends funds to an entity that is in need of funds (known as the borrower – which may be a corporation, municipality, or a government/country). In exchange for access to those funds, the borrower agrees to pay a contractual rate of interest over the term of the bond to the investor (in addition to providing an underlying promise to repay the funds at maturity).

The contractual/stated rate of interest denoted in the bond documents is called the coupon rate, or coupon for short, and is fixed over the life of the bond. In today’s interest rate environment, the interest rates and the related coupon payments, have become rather meaningful to bond investors – especially those relying on their portfolios for a steady/predictable stream of income.

The phrase “clipping coupons” simply refers to investors collecting the interest payments on their bond holdings. It harkens back to many decades ago when bonds came with actual tear-off coupons that were redeemed for the interest payments. Nowadays, with electronic custody of their investments, the interest simply posts to the bondholder’s account so you can put your scissors away!

There you have it – you learned a new piece of industry jargon. Drop it into a conversation with your friends and impress them with your knowledge!

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