Bond terminology

[wrongsaidfred]

Hi David,

Unfortunately I have another very dumb question to ask. When dealing with coupon bearing bonds, how will they (the FRM writers) describe the coupon? You tend to use the terminology "a 5% semi-annual coupon" to mean that the coupon RATE is 5%, not that each coupon is for 5% of the face value. Is this the universally accepted jargon (will the exam use this terminology)? Are there other ways that they could state this?

Thanks in advance for any clarity you could provide.

Mike

 

[David Harper CFA FRM]

Hi Mike,

Your terminology is correct. On this terminology, GARP is definitely consistent: like my questions, they will always give you a coupon (aka, nominal) rate. And this is standard practice when quoting. So you will see GARP following common practice (e.g. Bloomberg bond quotes) with coupon rates:

* 5% semi-annual coupon; i.e., $5 per $100 face (par) but paid in two installments, once every six months, OR the same thing:
* 5% coupon rate payable semi-annually

both of these are equivalent and, of course, imply an effective annual rate (EAR) of (1+5%/2)^2 - 1 = 5.0625%, but you would NEVER see (eg) "2.5% each six months"

GARP does tend to use the phrase "coupon rate" (I do avoid adding the "rate" just because i don't like to encourage any suggestion that it might be the effective rate, but that's a really tiny thing)

Thanks, David