Residual Interest Bonds - RIBS

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DEFINITION

A type of inverse floating-rate bond created by dividing the income from a municipal bond into two portions. The municipal bondholder will create two new securities: a primary direct floating-rate bond and a residual inverse floating-rate bond. The floaters will be linked to a reference interest rate, such as LIBOR, and the municipal bond's income will be used to pay the coupon on the direct floater, with any remaining income going toward the residual interest bond.

INVESTOPEDIA EXPLAINS

Because the residual interest bond is an inverse floater and only pays a residual income, its price will be highly sensitive to changes in interest rates. As market interest rates increase, investors can expect to see large decreases in the value of a residual interest bond.


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