Coupon is a term used in securitisation to refer to the periodic interest payments that are made to investors in securitised products. The coupon rate is the percentage of the face value of the security that is paid out as interest each period.
For example, if a security has a face value of $100 and a coupon rate of 5%, then the investor will receive $5 in interest payments each year. The coupon rate is typically fixed for the life of the security, but it can be floating, which means that it changes over time in accordance with a pre-agreed formula.
Coupons are an important part of securitised products, as they provide investors with a regular stream of income. The coupon rate is one of the factors that investors consider when making investment decisions, as it determines the yield on the investment.
Here are some examples of coupons in securitisation:
- A mortgage-backed security (MBS) might have a coupon rate of 5%.
- A credit card securitisation might have a floating coupon rate that is linked to the London Interbank Offered Rate (LIBOR).