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.

BREAKING DOWN '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.

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