DEFINITION of 'Current Coupon'

A current coupon refers to a security that is trading closest to its par value without going over par. A bond has a current coupon status if its coupon is set approximately equal to the bonds' yield to maturity (YTM) at the time of issuance.

BREAKING DOWN 'Current Coupon'

The movement of interest rates in the markets impacts the value of a bond. When interest rates increase, the price of a bond falls, and vice versa. Regardless of the direction of interest rate movements in the economy, the rates on a bond are usually fixed. These fixed rates are referred to as coupon rates, and they determine the interest income a bond holder will receive periodically on his or her fixed income investment. If interest rates rise, new issues will have a higher coupon rate than existing issues. A bond with a coupon close to the yields currently offered on new bonds of a similar maturity and credit risk is known as a current coupon bond.

A current coupon bond is one that is selling at a price close to its par value. The bond has a coupon that is within 0.5% above or below current market rates. Current coupon bonds are typically less volatile than other bonds with lower coupons because the coupon rate is closer to that set by the market. Because a current coupon bond is less volatile, it is also less likely to be called. It has implied call protection rather than an explicit call provision. Its inherent stability, however, also means that it won't offer as great of a return.

The current coupon is mostly used to understand yield spreads of mortgage-backed securities (MBS) which are guaranteed by U.S. government-sponsored enterprises Fannie Mae and Freddie Mac and the government agency Ginnie Mae. As the underlying mortgages of MBSs have different interest rates, various MBSs will have different coupons. In the MBS market, a current coupon is defined as the to-be-announced (TBA) mortgage security of any issue for the current delivery month that is trading closest to, but not exceeding par value. A TBA qualification means that the pool of mortgages that will back the security has not been assigned, even though the contract is about to be made. A synthetic 30-year fixed-rate MBS in the TBA market is the current coupon used as a benchmark throughout the industry to price and value mortgages.

To determine which security is the current coupon, it is necessary to know the par value of the mortgages, which is the sum of the outstanding principals on the underlying mortgages. The current coupon is calculated by interpolating the highest coupon below par and the lowest coupon above par, adjusting for the delay days associated with the securities in question. Alternatively, it is obtained by extrapolating from the lowest coupon above par in case no coupon is trading below par. For example, TBA mortgage securities often trade with interest rates in increments of 0.5%. Therefore, assuming a par value of 100, if Fannie Mae 8% mortgage securities are trading at 99.5 and Fannie Mae 8.5% mortgage securities are trading at 100.75, Fannie Mae's 8% security would be the current coupon.

A principle of mortgage analysis is that the higher a mortgage-backed security's coupon is relative to the current coupon, the more likely that mortgage-backed security is to prepay. Mortgage investors make this relative value analysis in calculating MBS yields and valuations. In addition, the current coupon reflects the state of the mortgage market; thus, lenders and borrowers can use it as an indicator of what the fair rate for new mortgages should be.

RELATED TERMS
  1. To Be Announced - TBA

    To be announced is a phrase used to describe a forward-settling ...
  2. Drop

    Drop is the price difference between when an investor sells a ...
  3. Gross Coupon

    A term used to describe the coupon received from a mortgage pool ...
  4. Mortgage Par Rate

    A mortgage par rate is the standard rate calculated by an underwriter ...
  5. First Mortgage

    A first mortgage is the primary lien on the property that secures ...
  6. Mortgage Banker

    A company, individual or institution that originates mortgages. ...
Related Articles
  1. Personal Finance

    Mortgage Rates May Get a Breather this Week: Mortgage Reports

    Mortgage rates may get a breather this week, with a dearth of economic news scheduled.
  2. Investing

    Should You Invest In Fannie Mae Stock?

    If you're risk-adverse, you might want to avoid investing in Fannie Mae. But if you're up for it, high risk could translate to high reward.
  3. Personal Finance

    Behind the scenes of your mortgage

    Four major players slice and dice your mortgage in the secondary market
  4. Personal Finance

    Mortgage Company

    A company engaged in the business of originating and/or funding mortgages for residential or commercial property.
  5. Personal Finance

    Jumbo Vs. Conventional Mortgages: How They Differ

    Size does matter – and it affects everything from down payments to interest deductions.
  6. Investing

    Mortgage Rates Move Higher as Fed Signals Rate Hikes Are Coming

    Mortgage rates continue to increase after the Fed signaled that three rate hikes are likely this year.
  7. Personal Finance

    Are mortgage-backed securities backed by any guarantees?

    Actually, any mortgage-backed security (MBS) guarantee depends on who issued it.To review, an MBS is a security, created through the process of securitization, in which the underlying assets ...
  8. Personal Finance

    Understanding the Mortgage Payment Structure

    A full explanation of mortgage calculation and payment process as well as the amortization schedule of home loans.
  9. Personal Finance

    6 Sneaky Ways Coupons Make You Spend More

    If you're hoping to save money by using coupons, watch out for sellers' strategies.
  10. Investing

    The Top 5 Fannie Mae Shareholders (FNMA)

    Find about the individuals, funds and companies that are top shareholders of Fannie Mae stock. Learn about their profiles and their relationships with Fannie Mae.
RELATED FAQS
  1. Can I buy a house directly from Fannie Mae (FNMA)?

    Yes, Fannie Mae does sell properties it's foreclosed on; each property is sold in "as is" condition. Read Answer >>
  2. What is the most common solvency ratios used in fundamental analysis?

    Learn about the difference between a bond's coupon rate and its yield rate, how the coupon rate influences market price and ... Read Answer >>
  3. How do debit spreads impact the trading of options?

    Find out what it means when a bond has a coupon rate of zero and how a bond's coupon rate and par value affect its selling ... Read Answer >>
Hot Definitions
  1. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  2. Financial Industry Regulatory Authority - FINRA

    A regulatory body created after the merger of the National Association of Securities Dealers and the New York Stock Exchange's ...
  3. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
  4. Cost of Goods Sold - COGS

    Cost of goods sold (COGS) is the direct costs attributable to the production of the goods sold in a company.
  5. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and expenses incurred during a specified period of time, usually ...
  6. Monte Carlo Simulation

    Monte Carlo simulations are used to model the probability of different outcomes in a process that cannot easily be predicted ...
Trading Center