DEFINITION of 'Ex Coupon'

Ex-coupon is a bond or preferred stock that does not include the interest payment or dividend when purchased or sold. A bond that is ex coupon is sold or bought with the knowledge that the investor will not receive the next coupon payment from the bond. The lack of interest payments should be taken into account when purchasing the bond and discounted accordingly.

Ex-coupon is also referred to as ex-interest.

BREAKING DOWN 'Ex Coupon'

The period when coupon payments are made to bondholders is disclosed in the bond indenture at the time of issuance. Some bonds pay interest payments annually, others do so semi-annually, quarterly, or monthly. The coupon interest is paid to the bondholder of record. If an investor purchases a bond sometime between the last coupon payment and the next coupon payment, s/he will receive the interest as s/he will be the bondholder of record. The amount of interest over this period that will be credited to the buyer is called the accrued interest.

However, since the buyer does not earn all of the interest accrued over this period, s/he must pay the bond seller the portion of interest that the seller earned before selling the bond. For example, assume a bond has a fixed coupon that is to be paid semi-annually on June 1 and December 1 every year. If a bondholder sells this bond on October 1, the buyer receives the coupon payment on the next scheduled coupon date, December 1. In this case, the buyer must pay the seller the interest accrued from June 1 to October 1. This interest is embedded in the purchase price of the bond.

The purchase price of the bond can take two forms – cum-coupon and ex-coupon. In the United States, bonds always trade cum-coupon, that is, with coupon. The price for a bond trading cum-coupon is referred to as the full or dirty price, which is the agreed purchase price plus accrued interest. Some bond markets outside of the U.S. trade ex-coupon, that is, without coupon. Buyers of these bonds only pay the agreed purchase price for the bond (the clean price) and forego the next coupon payment. The seller collects and keeps the next interest due after the sale since s/he is registered as the holder of the bond at that date. However, since the buyer will own the bond during a small fraction of the coupon period, the seller must pay him the interest that accrues during that brief period.

The ex-coupon date can be defined as the date by which the trade must occur if the buyer is to receive the upcoming coupon. The ex-coupon date is the first day the bond starts trading without the coupon attached to it. If the debt security is purchased on or after the ex coupon date, the seller retains the right to receive the next due interest payment and no coupon is included with the bond. Therefore, the investor must buy or sell the asset before the ex coupon date in order to get it with a coupon linked to it.

RELATED TERMS
  1. And Interest

    And interest is a slang phrase used when quoting the price of ...
  2. Accrued Interest Adjustment

    Accrued interest adjustment is the extra amount of interest that ...
  3. Bond Washing

    Bond washing is the practice of selling a bond just before it ...
  4. Variable Rate Demand Bond

    A variable rate demand bond is a municipal bond with floating ...
  5. Bond Discount

    Bond discount is the amount by which the market price of a bond ...
  6. Income Bond

    An income bond is a type of debt security in which only the face ...
Related Articles
  1. Personal Finance

    6 Tricks To Make Coupons Work For You

    Use these strategies to counteract the stores' and manufacturers' coupon tactics and come out ahead.
  2. Investing

    Understanding Bond Prices and Yields

    Understanding this relationship can help an investor in any market.
  3. Personal Finance

    Couponing 101: Dos and Don'ts

    Coupon clipping isn't new, but it has gone digital. Find out how to use coupons to your advantage today.
  4. Personal Finance

    Is Coupon Clipping A Waste Of Time?

    Coupons reduce the cost of a product or service, but are the savings really worth the time it takes?
  5. Investing

    5 Reasons to Invest in Municipal Bonds When the Fed Hikes Rates

    Discover five reasons why investing in municipal bonds after the Fed hikes interest rates, and not before, can be a great way to boost investment income.
  6. Investing

    The Basics Of Bonds

    Bonds play an important part in your portfolio as you age; learning about them makes good financial sense.
  7. Investing

    Investing in Bonds: 5 Mistakes to Avoid in Today's Market

    Investors need to understand the five mistakes involving interest rate risk, credit risk, complex bonds, markups and inflation to avoid in the bond market.
RELATED FAQS
  1. How does a bond's coupon interest rate affect its price?

    Find out why the difference between the coupon interest rate on a bond and prevailing market interest rates has a large impact ... Read Answer >>
  2. How does the money from the interest on my bond get to me?

    When you buy a regular coupon bond, you are entitled to a coupon, which is typically paid at regular intervals, and the face ... Read Answer >>
  3. 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 >>
  4. If I buy a $1,000 bond with a coupon of 10% and a maturity in 10 years, will I receive ...

    See how fixed-income security investors can expect to use coupon rates on semi-annual payments if the bond or debt instrument ... Read Answer >>
  5. When is a bond's coupon rate and yield to maturity the same?

    Find out when a bond's yield to maturity is equal to its coupon rate, and learn about the components of bonds and how they ... Read Answer >>
  6. How can I calculate a bond's coupon rate in Excel?

    Find out how to use Microsoft Excel to calculate the coupon rate of a bond using its par value and the amount and frequency ... Read Answer >>
Trading Center