Final answer:
A coupon bond is a debt security that pays fixed interest to the holder at regular intervals, typically semi-annually, until maturity. It is used by entities to raise capital for projects. The value of a coupon bond can change with the market interest rates, affecting investor demand.
Step-by-step explanation:
Understanding Coupon Bonds
A coupon bond is a type of debt security under which the issuer owes the bondholders a debt and is obligated to pay them interest (the coupon) at regular intervals and repay the principal at a later date, known as the maturity date. In finance, the face value of a bond is the amount promised to be paid back to the investor at maturity, and the coupon rate is typically paid semi-annually. Companies often issue bonds to raise capital for new projects, and the value of these bonds can fluctuate with changes in market interest rates, affecting their attractiveness to investors.
For instance, if a bond with a face value of $1,000 has an annual coupon of 5%, it will generate $50 annually for the bondholder. Should interest rates decrease to 3.5%, the bond's payout at 5% becomes more appealing and will trade at a premium until the yield matches the lower interest rates. Conversely, if market rates rise to 6.5%, the bond appears less attractive since new bonds would potentially offer higher returns.