Coupon effect
The coupon effect ( French coupon : detachable slip of paper, in banking: coupon for fixed-income securities) is the term used to describe effects that occur in bonds as a result of different amounts of coupon payments. The most important effects are the theoretical coupon effect and the tax coupon effect.
Theoretical coupon effect
Fairly priced bonds with the same remaining term and from the same issuer are considered. The yield to maturity of the bonds then depends on the coupon.
The relationship also depends on the form of the interest rate structure . A distinction must be made between three cases:
- With a normal yield curve for bonds of the same residual maturity class and the same issuer , the effective interest rate (yield to maturity) falls as the coupon increases.
- With an inverse yield curve for bonds of the same residual maturity class and the same issuer , the effective interest rate (yield to maturity) increases with the coupon.
- No effect can be observed with a flat interest rate structure .
Tax coupon effect
The starting point is that coupon payments are taxable. In contrast, under German tax law, price gains on standard bonds are income tax-free , provided they are realized outside the speculation period. In addition, the options for offsetting price losses on bonds differ depending on the amount of the coupon.
Low coupon bonds have lower pre-tax rates than high coupon bonds.