Bonds
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What are some special features available in the bond market?
Most bonds are fixed rate bonds, where both the maturity date and the interest rate are set at the time
they’re issued. However, bonds with special features are also available:
- Inflation-Indexed Bonds — called Treasury Inflation-Protected Securities
or TIPS — are Treasury bonds that protect investors from inflation risk. The interest rate remains fixed,
but the principal amount is adjusted up or down to keep pace with inflation. This means that the amount
of interest you receive can increase or decrease when your principal changes. When the maturity date is
reached, the bond is redeemed for the inflation-adjusted principal amount or the original principal,
whichever is greater. These bonds are backed by the full faith and credit of the U.S. government.
- Callable Bonds — those that the issuer can redeem (“call”) at some
specified time(s) before the maturity date, at pre-set price(s). A company may choose to call a bond if
it can redeem the bond and then issue replacement bonds at a lower rate.
- Step-Up Bonds — pay one interest rate for an initial period, and then “step
up” to a higher rate for subsequent period(s). This “step-up” may happen several times over the term of
the bond. They can help protect the investor against inflation risk. However, they are most often
callable bonds (see above). If interest rates have fallen or remained flat, the issuer may redeem the
bond and the investor will not realize the higher interest payments from that bond.
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