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http://www.investinganswers.com/term/step-bonds-903
wow how the fuck does the op manage money, it's ok though people like you are needed to make money off of
The bonds 'step up' (that is to say the the coupon increases) on a regular basis which is good for reducing the interest rate risk for the purchaser while enjoying good returns (as long as the bond is not called)
The bad thing is that the bonds often make sense to Call and Reissue pre-stepup in flat interest rate environments giving the purchaser all their money back at a time of flat/decreased rates.
So, higher yield - higher risk of early repayment exactly when you do not want your money back (shitty interest rate environment)
thank you.
"its a bond which the issuer could redeem it anytime... and so in exchange for that right, i get paid a higher yield?"
No.
Callable is a bond which the issuer can recall at a specific time (it can be once,or in each interest payment date,or each payment date after some years etc). Usually they have higher interest to compensate for this,but it has nothing to do with the "step-up". Step-up bonds are the ones that the coupon rises after a specific period (ex 5 years).I think all step-up bonds are callable.It works like this (almost always): A bank (usually banks need these bonds) was to enhance its Tier 1 capital,which is just above equity.Threrefore,a bond to clasify as Tier 1 it should have very long maturity-to be similar to equity.But since nobody would buy such a bond,the issuer specified a date were the coupon is raised.This is sort of an indirect maturity.It implies that the issuer will call the bond in order to avoid the higher coupon.
Caution:Sometimes the issuer may decide to forfeit his right to call. Example,bond has coupon 2.5% annual,maturity 100 year (to clasify as Tier 1) and step-up after 5 years-4% coupon.This implies that the maturity will be 5 years,and the bond is priced as such.But if market conditions are very difficult and the risk for the company is high,or if we are in a period of very high interest rates,then a new bond issue would have a coupon>4%,so the company does not call it.The bondholder "loses":He gets a 4% coupon,but he could buy a new bond with a higher one.
thanks SalGr.
so are the banks the only ones that issue step-up bonds?
second, aside from banks issuing step-up bonds to shore up capital, what are other reasons that an issuer might issue step-up bonds?
thanks!
"so are the banks the only ones that issue step-up bonds?"
Not sure,but I think they are the ones typically issuing them.
"aside from banks issuing step-up bonds to shore up capital, what are other reasons that an issuer might issue step-up bonds?"
A step-up coupon is used to imply a different maturity than the actual one,I cant think of any other reason,sry
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