Business & Finance

What is the relationship between coupon rate on a bond and security provisions?


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Coupon Rate: The actual interest rate on the bond, usually payable in semiannual installments. The coupon rate normally stays constant during the life of the bond and indicates what the bondholder's annual dollar incomes will be.

Bond Security Provisions:

  • Secured Debt: Specific assets are pledged to bondholders in the event of default (inability to pay the debt).
  • Mortgage Agreement: Real property is pledged as a security (collateral) for the loan.
  • After-acquired property clause: Requires any new property to be placed under the original mortgage.

Specific security provisions can determine the coupon rate. Due to the specific asset claims in a secured bond most companies will opt for the unsecured debt as it will give the bondholder a claim against the corporation as oppose to a lien against an asset.