Commodity-Backed Bond

AAA

DEFINITION of 'Commodity-Backed Bond'

A commodity-backed bond is a type of debt security which is linked with the price of a commodity. Under the most common arrangement, the interest rate paid on a commodity-backed bond is set to fluctuate based on the market price of the commodity to which it is linked.

INVESTOPEDIA EXPLAINS 'Commodity-Backed Bond'

Commodity-backed bonds are often issued by the producers of those commodities. This reduces default risk since the profits of producers generally fluctuate based on the price of the commodity. If the price of the commodity increases, then the producers can afford to pay the higher interest rates. If prices fall, the producers pays less interest, cushioning the blow.

RELATED TERMS
  1. Maintenance Bond

    A type of surety bond purchased by a contractor that protects ...
  2. Commodity Trader

    Unlike stock traders, who buy and sell equities, commodity traders ...
  3. Commodity

    1. A basic good used in commerce that is interchangeable with ...
  4. Commodity Swap

    A swap in which exchanged cash flows are dependent on the price ...
  5. Commodities Exchange

    An entity, usually an incorporated non-profit association, that ...
  6. Commodity ETF

    Exchange-traded funds that invest in physical commodities such ...
Related Articles
  1. Commodities: The Portfolio Hedge
    Active Trading

    Commodities: The Portfolio Hedge

  2. Commodity Prices And Currency Movements
    Forex Education

    Commodity Prices And Currency Movements

  3. Water: The Ultimate Commodity
    Mutual Funds & ETFs

    Water: The Ultimate Commodity

  4. Trading Gold And Silver Futures Contracts
    Options & Futures

    Trading Gold And Silver Futures Contracts

comments powered by Disqus
Hot Definitions
  1. Ghosting

    An illegal practice whereby two or more market makers collectively attempt to influence and change the price of a stock. ...
  2. Elasticity

    A measure of a variable's sensitivity to a change in another variable. In economics, elasticity refers the degree to which ...
  3. Tangible Common Equity - TCE

    A measure of a company's capital, which is used to evaluate a financial institution's ability to deal with potential losses. ...
  4. Yield To Maturity (YTM)

    The rate of return anticipated on a bond if held until the maturity date. YTM is considered a long-term bond yield expressed ...
  5. Net Present Value Of Growth Opportunities - NPVGO

    A calculation of the net present value of all future cash flows involved with an additional acquisition, or potential acquisition. ...
  6. Gresham's Law

    A monetary principle stating that "bad money drives out good." In currency valuation, Gresham's Law states that if a new ...
Trading Center