Multi coupon bonds


  1. Step-Up Bonds
  2. What it is:
  3. Step-Ups - Types of Fixed Income Bonds | Raymond James
  4. Bonds and their Types

In effect, the step-up investor chooses to forgo some interest income in the near-term in exchange for the potential of receiving a higher yield over the life of the investment. The risk, however, is that as the coupon rate on a step-up bond rises over comparable rates, the bond is more likely to be called by the issuer and the investor will not receive these higher coupon payments.

Step-Up Bonds

Additionally, as the future coupons on step-ups may reset to higher levels than those of comparable fixed-rate securities, there is also a greater likelihood of a step-up being called. This may expose the investor to reinvestment risk, as the principal will most likely be returned during a lower interest rate environment. As compensation for the right to redeem the bond early, the issuer will provide the investor with a higher coupon rate than would typically be available for a similar non-callable security.

On the other hand, an investor is also exposed to risk that the scheduled coupon increases may not keep up with prevailing interest rates. If liquidity is desired in the secondary market, premiums on step-up prices will be bounded by the price to the first call date. On the downside, the gradual increase in the coupon, assuming the bonds are not called, may partially protect the investor from price erosion. However, if interest rates jump drastically, the chance of a call will be reduced and the investor may end up holding a bond with a lower coupon than others currently available in the market, and therefore a lower price.

How it works (Example):

A bond is similar to the loan in many aspects however it differs mainly with respect to its tradability. A bond is usually tradable and can change many hands before it matures; while a loan usually is not traded or transferred freely. The entities that borrow money by issuing bonds are called as issuers.

What it is:

In the US, there are mainly 4 major issuers of bonds which include the government, government agencies, municipal bodies, and corporates. Every bond that is issued has a face value; which is usually the principal amount that is borrowed and returned on maturity.

Zero Coupon Bonds

Every bond is usually rated by credit rating agencies; higher the credit rating lower will be the coupon required to pay by the issuer and vice versa. The coupon payments on the bond usually have a payment frequency. The coupons are usually paid annually or semi-annually; however, they may be paid quarterly or monthly as well. The effective return that the investor makes on the bond is called as a return.

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  • Step-Up Bonds Definition & Example | InvestingAnswers;

If the holding period is considered for a year this is referred to as current yield and if it is held to maturity it is referred to as yield to maturity YTM. There are many types of bonds issued that differentiate each other in respect of their features. These features vary depending upon the requirement of the issuer. Let us have a look at some of the major types of bonds issued.

Step-Ups - Types of Fixed Income Bonds | Raymond James

A plain vanilla bond is a bond without any unusual features; it is one of the simplest forms of bond with a fixed coupon and a defined maturity and is usually issued and redeemed at the face value. It is also known as a straight bond or a bullet bond. A zero coupon bond is a type of bond where there are no coupon payments made.

The difference will be the yield for the investor. These are also called as discount bonds or deep discount bonds if they are for longer tenor. This type of bond is a blend of a coupon-bearing bond and a zero coupon bond.

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  • Step-up Bonds;

These bonds do not pay any coupon in the initial years and thereafter pay a higher coupon to compensate for no coupon in the initial years. Such bonds are issued by corporates whose business model has a gestation period before the actual revenues start. Examples of a company which may issue such type of bonds include construction companies. These are bonds where the coupon usually steps up after a certain period. They may also be designed to step up not once but in a series too.

Bonds and their Types

These are also called as a dual coupon or multiple coupon bonds. These are just the opposite of Step-Up Bonds. Coupons are normally described in terms of the coupon rate , which is calculated by adding the sum of coupons paid per year and dividing it by the bond's face value. The origin of the term "coupon" is that bonds were historically issued in the form of bearer certificates. Physical possession of the certificate was proof of ownership. Several coupons, one for each scheduled interest payment, were printed on the certificate. At the date the coupon was due, the owner would detach the coupon and present it for payment an act called "clipping the coupon".

The certificate often also contained a document called a talon , which when the original block of coupons had been used up could be detached and presented in exchange for a block of further coupons. Not all bonds have coupons. Such bonds make only one payment: Normally, to compensate the bondholder for the time value of money , the price of a zero-coupon bond will always be less than its face value on any date before the maturity date.