Step-Up Bond

DEFINITION of 'Step-Up Bond'

A bond that pays an initial coupon rate for the first period, and then a higher coupon rate for the following periods. A step-up bond is one in which subsequent future coupon payments are received at a higher, predetermined amount than previous or current periods. These bonds are often purchased by individuals or portfolio managers who wish to hold fixed income securities with similar features to TIPS, but with a higher coupon.

BREAKING DOWN 'Step-Up Bond'

These bonds are known as step-ups because quite literally the coupon "steps up" from one period to another. For example, a five-year bond may pay a 4% coupon for the first two years of its life and a 6% coupon for the final three years. Such a bond would most likely offer a coupon below current rates at the time of inception, compensating the seller for offering higher coupons in coming periods.

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