Rate Trigger

AAA

DEFINITION of 'Rate Trigger'

A sizeable decline in interest rates that may trigger or cause companies to call in bonds that otherwise pay high coupon or interest rates. Because these bonds are being called before their initial expiration date, theoretically, bondholders can expect to receive a premium or additional sum for their securities.

INVESTOPEDIA EXPLAINS 'Rate Trigger'

As an example, if a company that issues bonds containing a coupon or interest rate of 12% was to see the prevailing interest rate to drop to 7%, it may exercise its option to "call", or buy back these bonds from the debt holders, enabling the company to borrow money at a much lower rate than when the security was first issued. The company, however, must pay bondholders a premium, or an additional amount over and above the bond's par value in order to repurchase the debt. The fluctuation in interest rates acted as the trigger for such an action.

RELATED TERMS
  1. Callable Bond

    A bond that can be redeemed by the issuer prior to its maturity. ...
  2. Coupon

    The interest rate stated on a bond when it's issued. The coupon ...
  3. Interest Rate

    The amount charged, expressed as a percentage of principal, by ...
  4. Bond

    A debt investment in which an investor loans money to an entity ...
  5. Surrender Period

    The amount of time an investor must wait until he or she can ...
  6. Class 3-6 Bonds

    Several classes of noninvestment grade bonds held by an insurance ...
Related Articles
  1. Investing

    The Advantages Of Bonds

  2. Retirement

    Bond Basics Tutorial

  3. Bonds & Fixed Income

    How long will it take for a bond to ...

  4. Bonds & Fixed Income

    What determines the price of a bond ...

Hot Definitions
  1. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  2. Conduit Issuer

    An organization, usually a government agency, that issues municipal securities to raise capital for revenue-generating projects ...
  3. Financing Entity

    The party in a financing arrangement that provides money, property, or another asset to an intermediate entity or financed ...
  4. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is ...
  5. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
  6. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
Trading Center