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Step-up bond

Step-up bond Definition

A bond that pays the investor an initial above-market yield for a short, noncall period and then, if not called, steps up to a predetermined higher coupon rate. The bond may include a series of step-up rates and is callable at every step-up date. For example, the initial rate may be 5 percent, increasing to 6 percent after two years, and 7 percent after four years. The bond is designed to protect the issuer against falling market interest rates. If interest rates fall, the issuer can call the bond. If interest rates rise to levels equal to or higher than the step-up rate, the issuer would likely not call the bond. A step-up bond is a type of structured note.

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