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What is a Step-Up Bond
A step-up bond is a type of variable note. The step-up bonds coupon increases at regular intervals until the bond reaches its full maturity. These higher rates are predetermined when the bond is initially purchased. The benefit of this type of bond is that an investor does not have to concern themselves with how the price will fluctuate relative to the market index, since the higher coupon rate is fixed. Step-up bonds are generally issued by government agencies.
Example of a Step-Up Bond
Let's say an investor purchases a 5-year step-up bond from Company A. This step-up bond has a rate of 3% for the first three years and 5% for the last two years. The benefit of the step-up bond is that the investor will usually receive the initial coupon above the market and will know exactly what to expect from their bond over the long-term.
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