A bond that is issued as a zero-coupon bond but which converts to a coupon paying bond at a specific time during its life. This bond is usually issued by companies and municipalities which don’t want to pay out cash interest for the first few years of a bond’s life. For example, a 10-year split coupon bond might pay no interest for the first 5 years and then transforms into a fixed-coupon bond that pays 11% interest for the remainder of its life. This hypothetical bond is designated “0/11”, meaning it starts as a zero-coupon security and later becomes an 11% interest-bearing bond. Investors find such a bond attractive because it allows them to lock in a reinvestment rate for several years, where they will receive cash interest at a future date.
A split coupon bond is also known as a zero-coupon convertible bond.
