What is a Rate Trigger?
How Does a Rate Trigger Work?
Let's say Company XYZ issued a bond with a 10% coupon rate this . The mature in 10 years. The bonds are callable, meaning that Company XYZ can pay the bonds off early.
Now let's assume that three years go by and interest rates have fallen considerably. Company XYZ talks to investment bank ABC and learns that it could bonds at just 5%. This would save it millions in interest expense.
Accordingly, the 5% acts as a rate trigger, and Company XYZ decides to borrow the and use it to pay off the 10% bonds seven years early. The people who owned the 10% bonds get their money back, but they lose out on seven more years of 10% payments.
Why Does a Rate Trigger Matter?
Rate triggers prompt change. They have major effects for investors who hold, because their has an incentive to the securities in order to save .