Step Up Bonds: Pros and Cons
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.
Pros of Step-Up Bonds
Step-up bonds are popular because they provide several distinct advantages to investors. Some of these advantages are mentioned below:
Cons of Step-Up Bonds
Step-up bonds also have some significant disadvantages. Details of these disadvantages have been mentioned below:
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 arent popular with others.
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