There are things in life we all wish we'd never heard of: bacon-flavored toothpaste, tramp stamps, combovers, meat from a can.
That sentiment is true in theworld, too, especially for those of us who have been burned once or twice.
But remember, information is the best, and knowing more is always better than knowing less. Ask yourself how many kinds of you can name, and you'll know what I'm talking about.
Here are a few more that you've probably never heard of.
A step-up Fannie Mae and Sallie Mae, these .has a that increases ("steps up"), usually at regular intervals, while the is outstanding. Government agencies, as well as
Consider a five-year step-up bond issued by Company XYZ. The coupon rate might be 7% for the first two years, increasing to 8% for years three and four, and 9% in the fifth . that the initial coupon rate on a step-up bond is usually above .
Many step-up bonds are callable, which gives issuers some protection against falling interest rates. So if after three years the debt at a lower rate.is paying 8% but rates are down to 5% (Scenario A, as pictured in the chart below), Company XYZ would be paying a relatively high interest rate on its . It would probably the and reissue the
In fact, if rates simply stay the same (Scenario B), Company XYZ market rates rise to 10% (Scenario C) and Company XYZ gets to pay only 8% for its debt, well, then it's getting a deal.probably the . Conversely, if
There are several advantages to step-up bonds: Theypayments that somewhat , they usually come from high-quality issuers, and they are fairly . Another advantage is that they lessen the interest-rate risk for the investor: The increasing rates provide a better than a fixed-rate note (as long as the is not called).
If rates rise, for example, the prices of step-up bonds don't fall as much as a similar noncallable (This is because of the future increase in coupon rate.) If rates fall, the price of a similar noncallable tends to increase more than the step-up's price.
A payment-in-kind principal payments with either or additional . One of the most famous PIK came in 1989 when RJR Nabisco issued $1 billion of them as part of Kohlberg Kravis Roberts' well-known leveraged buyout of the company.(PIK ) gives the the of making interest and
Take a $1,000 face-value Company XYZ PIK coupon. If this were a traditional , you'd receive a $60 cash interest payment every six months. ([$1,000 face value x 12% coupon rate] / 2 = $60) But because it's a PIK , you might get some interest paid out in cash and the rest in more Company XYZ PIK (For example, using the above example, you might receive $10 in cash and $50 in Company XYZ stock every six months. (Note that the par value is equal to the interest payment.)with a 12%
The amount of the coupon payment that may be made "in kind" -- that is, with more indenture agreement. Often, most of the coupon is paid in kind early on, with a larger cash payment later (presumably as the company sees the financial rewards of its use of the proceeds). In some cases, PIK have variable-rate coupons. Note though, that in general, even though you don't get cash interest payments, accrued interest is still taxable.-- usually changes throughout the life of the according to a schedule set forth in the
Ultimately, PIKissuers can debt forever because whenever interest or principal is due, they just make those payments with more . Theoretically, this makes less likely, but many financial professionals agree that it really just delays the 's inevitable demise.
A baby Treasury Department from 1935 to 1941. In the United Kingdom, the refers to a tax-exempt program for children.has a par value below $1,000. However, the also refers to issued by the
Baby bonds usually carry the same maturity as traditional , although many are zero-coupon . Let's assume Company XYZ wants to issue $5 million of with a 6% coupon. Company XYZ may not see much interest from the for such a relatively small issue, because at $1,000 face value per , Company XYZ would only issue 5,000 ., coupon and
However, if Company XYZ issued $5 million of baby bonds with a $250 face value, it may actually generate more demand for the issue for two reasons -- the liquid because there would be 20,000 outstanding ($5,000,000 / $250) rather than 5,000 at the $1,000 face value. The would still carry a 6% coupon, and Company XYZ's principal and interest payments would remain the same.are more affordable to small investors, and the market for the would be more
The corporate bonds, there's a whole lot more to it than that. Don't let ignorance shut you out of potentially great investments -- go out there and learn more! The three bonds we've shown you are unusual, but they could be just the thing you're looking for.Answer: Though the bond world seems to revolve around Treasurys and
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