Covered Bonds
February 12, 2025
The proprietary ratio is not amongst the commonly used ratios. Very few analysts prescribe its usage. This is because in reality it is the inverse of debt ratio. A higher debt ratio would imply a lower proprietary ratio and vice versa. Hence this ratio does not reveal any new information. Formula Proprietary Ratio = Total […]
In the previous articles, we have discussed that the money market has various sub-sections. One of the most important sub-markets is the commercial paper market. The commercial paper market accounts for a sizeable amount of funds that flow through the money market. In this article, we will have a closer look at the details of […]
The topic of investment banking is fascinating. This is because some of the biggest banks in the world i.e., Barclays, JP Morgan, Citi, Morgan Stanley, etc. all have investment banking divisions. In fact, they have had investment banking divisions for a very long time. The average age of these investment banks is often said to […]
In the previous article, we studied about the concept of sweeping. We are now aware that commercial banks provide their clients with the facility to sweep additional balances into a centralized account. However, we are also aware that such facilities are generally provided to corporations that use the commercial bank as their main or primary […]
Concept of Carry Trade Carry trade is a kind of trade that is peculiar to the Forex market. In other markets, traders trade with the intention of benefitting from capital appreciation. However, in case of carry trade, traders have two expectations. They want to earn cash from capital appreciation as well as from the interest […]
Step-up bonds are special types of fixed income instruments. They help investors partially offset the risks of rising interest rates. This is because when investors invest in a bond, they typically lock in an interest rate. If the interest rate rises beyond that number, then the investors are at a loss because their money has been locked up at a lower rate. This is not the case with step-up bonds where the interest rates rise according to a predetermined schedule.
Step-up bonds can also be of multiple types. For instance, step-up bonds can either be single-level step-up bonds or multi-level step-up bonds. The interest rates of single-level step up bonds reset only once during the lifetime of the bond whereas multi-level step up bonds reset several times.
In this article, we will understand the pros and cons of investing using step-up bonds.
Step-up bonds are popular because they provide several distinct advantages to investors. Some of these advantages are mentioned below:
Step-up bonds also have some significant disadvantages. Details of these disadvantages have been mentioned below:
It is true that step-up bonds can also be non-callable which would make the interest commitments legally binding for the company regardless of general market conditions. However, non-callable step-up bonds are rare since most companies are averse to giving such commitments.
The bottom line is that step-up bonds serve a very specific purpose. They work well only for certain types of investors who have specific needs. This is the reason that these types of bonds are very popular amongst certain investor communities whereas they aren’t popular with others.
Your email address will not be published. Required fields are marked *