Baby Bonds

Baby bonds usually carry the same terms, coupon, and maturity as traditional bonds, although many are zero-coupon bonds. For example, let's assume XYZ Company wants to issue $5 million of bonds with a 6% coupon. XYZ Company may not see much interest from the capital markets for such a relatively small issue, because at $1,000 face value per bond, XYZ Company would only issue 5,000 bonds.

However, if XYZ Company issued $5 million of baby bonds with a $250 face value, it may actually generate more demand for the issue for two reasons. First, the bonds are more affordable to small investors. Second, the market for the bonds would be more liquid because there would be 20,000 bonds outstanding ($5,000,000 / $250) rather than 5,000 at the $1,000 face value. The bonds would still carry a 6% coupon, and XYZ Company's principal and interest payments would remain the same.