Define Split Coupon Bonds

Split coupon bonds are similar to Pay-in-kind or PIK bonds in that no interest is paid in the first few years (except that here the issuer has no option). The split coupon bond is a hybrid of the zero coupon bond and the fixed-rate bond. The bond is issued at a discount to face value (like 0.92) and the interest accrues until a specified time (like, when the value of the bond is 1.0). Thereafter, interest is paid at the coupon rate until maturity date.

Such bonds are issued in order that debt servicing is removed in a specified period. Such bonds have been issued to finance leveraged buyouts and recapitalization and therefore carry a higher yield than equivalent term (uncomplicated) bonds.