Cushion Bond

AAA

DEFINITION of 'Cushion Bond'

A type of callable bond that sells at a premium because it carries a coupon rate that is above market interest rates. A cushion bond's call feature means that it will be priced on a yield-to-call basis (meaning it can be redeemed prior to maturity), rather than on a yield-to-maturity basis; this relatively shortened maturity decreases its sensitivity to changes in interest rates. A cushion bond is so called because its resilience to interest rate fluctuations provides a cushion or a degree of protection against rate changes, especially when they are rising.

INVESTOPEDIA EXPLAINS 'Cushion Bond'

Cushion bonds may be especially suitable for conservative investors who do not wish to see too much volatility in the value of their fixed income portfolios. Such investors may be willing to sacrifice upside potential in their bond portfolio for the benefit of lower downside risk.

For other investors, the lower sensitivity of a cushion bond may be a desirable attribute when interest rates are rising, since its above-market coupon rate and call feature will diminish the impact of higher interest rates. As a result, the cushion bond's market price will decline less than other comparable bonds without these features.

When interest rates are falling, however, the cushion bond will appreciate in price to a lesser extent than other comparable bonds that are non-callable and have lower coupon rates. This may make cushion bonds less desirable to the average investor during periods of falling interest rates.

RELATED TERMS
  1. Yield To Maturity (YTM)

    The rate of return anticipated on a bond if held until the maturity ...
  2. Forced Conversion

    The occurrence of an issuer of a convertible security exercising ...
  3. Yield To Call

    The yield of a bond or note if you were to buy and hold the security ...
  4. Premium

    1. The total cost of an option. 2. The difference between the ...
  5. Coupon

    The interest rate stated on a bond when it's issued. The coupon ...
  6. Callable Bond

    A bond that can be redeemed by the issuer prior to its maturity. ...
RELATED FAQS
  1. What is the relationship between the hurdle rate (MARR) and the Internal Rate of ...

    In capital budgeting, projects are often evaluated by comparing the internal rate of return, or IRR, on a project to the ... Read Full Answer >>
  2. What is the rationale behind the effective interest rate?

    There are several different effective interest rates. In accounting, the effective interest method examines the relationship ... Read Full Answer >>
  3. What is the difference between compounding interest and simple interest?

    Interest is the cost of borrowing money, where the borrower pays a fee to the owner for using the owner's money. The interest ... Read Full Answer >>
  4. What is the relationship between modified duration and interest rates?

    Modified duration is a formula that measures the value of a bond in relation to changes in interest rates. Modified duration ... Read Full Answer >>
  5. What does positive theta mean for credit spreads?

    Theta is an option Greek that measures the rate of change in an option's value with respect to the passage of time. When ... Read Full Answer >>
  6. What are the risks associated with investing in a treasury bond?

    It's common for financial analysts and investment publications to refer to U.S. Treasury bonds (T-bonds) as risk-free investments. ... Read Full Answer >>
Related Articles
  1. Bonds & Fixed Income

    5 Reasons To Trade Bonds

    Investors can find great financial opportunities in the bonds markets.
  2. Retirement

    Bond Basics Tutorial

    Investing in bonds - What are they, and do they belong in your portfolio?
  3. Bonds & Fixed Income

    Advanced Bond Concepts

    Learn the complex concepts and calculations for trading bonds including bond pricing, yield, term structure of interest rates and duration.
  4. Mutual Funds & ETFs

    Is the PowerShares (PFEM) ETF a Good Bet Now?

    What you need to know if you are considering trading PowerShares Fundamental Emerging Markets Local Debt ETF.
  5. Mutual Funds & ETFs

    Anatomy of Emerging Markets Debt ETF (EMLC)

    This emerging market bond ETF offers a high yield, but there are dangers. Find out why.
  6. Trading Strategies

    How to Pick the Best Dividend Stocks

    Dividend stocks can make you rich, but you have to be patient.
  7. Trading Strategies

    4 Quality Dividend Stocks You Need to Consider

    Looking for quality stocks that also pay dividends? Consider these four.
  8. Trading Strategies

    Are These the Top Monthly Dividend Stocks?

    Interested in monthly dividends? Here are two stocks to watch.
  9. Professionals

    Beware: These Bond Funds Act Like Stocks

    Beware of bond funds that act like stocks.
  10. Investing

    Three Portfolio Moves To Consider Now

    What portfolio moves should you consider making as the 2nd quarter kicks off? Before we focus on the future, let’s first reflect on the 1st Q surprises.

You May Also Like

Hot Definitions
  1. Carrying Value

    An accounting measure of value, where the value of an asset or a company is based on the figures in the company's balance ...
  2. Capital Account

    A national account that shows the net change in asset ownership for a nation. The capital account is the net result of public ...
  3. Brand Equity

    The value premium that a company realizes from a product with a recognizable name as compared to its generic equivalent. ...
  4. Adverse Selection

    1. The tendency of those in dangerous jobs or high risk lifestyles to get life insurance. 2. A situation where sellers have ...
  5. Wash Trading

    The process of buying shares of a company through one broker while selling shares through a different broker. Wash trading ...
Trading Center