Talon

3 key takeaways

• A talon is attached to a coupon bond and allows the holder to receive a new sheet of coupons after the original coupons have been redeemed.
• It ensures that the bondholder continues to receive interest payments or dividends throughout the bond’s maturity.
• Understanding talons is important for managing investments in coupon bonds and ensuring all entitled payments are received.

What is a talon?

A talon is a component of a coupon bond or bearer bond that entitles the bondholder to receive additional coupons after the initial set of coupons has been fully used. Coupon bonds come with detachable coupons that the holder redeems for interest payments or dividends at specified intervals. Once all the original coupons are redeemed, the talon allows the bondholder to obtain a new sheet of coupons from the issuer, ensuring that they continue to receive their periodic payments.

Talon is particularly relevant for long-term bonds, where the initial set of coupons may not cover the entire duration of the bond’s life. The talon ensures that the bondholder receives all the payments they are entitled to throughout the bond’s maturity.

How does a talon work?

• Attachment to the bond: The talon is physically attached to the bond certificate, along with the initial set of coupons.
• Redemption process: As the bondholder redeems each coupon for interest payments or dividends, they keep the talon attached to the bond.
• Exhaustion of initial coupons: Once all the initial coupons are redeemed, the bondholder presents the talon to the issuer or an authorized agent.
• Issuance of new coupons: The issuer or agent issues a new sheet of coupons to the bondholder, ensuring the continuation of periodic payments until the bond reaches maturity.

Examples of talon usage

• Long-term government bonds: Governments may issue long-term bonds with coupon payments. A 30-year bond might have an initial set of coupons covering the first 15 years. After these are redeemed, the talon allows the holder to receive a new set of coupons for the remaining 15 years.
• Corporate bonds: Corporations issuing long-term debt may use talons to ensure bondholders continue to receive interest payments throughout the bond’s life. For example, a 20-year corporate bond might have an initial set of coupons for the first 10 years, with a talon allowing for the issuance of new coupons for the subsequent 10 years.

Understanding talons is important for investors in coupon bonds to ensure they receive all their entitled interest payments or dividends. Proper management of talons helps investors maintain a consistent income stream from their bond investments. For further exploration, consider studying the specific terms and conditions of coupon bonds, the processes for redeeming coupons and talons, and the role of talons in different types of fixed-income securities.