| TERM OF THE DAY - MARCH 20, 2008 |
| Bunny Bond |
| What Does it Mean? A type of bond that offers investors the option to reinvest coupon payments into additional bonds with the same coupon and maturity. Also known as a "multiplier bond" or a "guaranteed coupon reinvestment bond". |
| Investopedia Says... Bunny bonds are an effective way to protect against reinvestment risk, which arises from the possibility that interest rates will drop in the future. With a normal bond, investors are exposed to the risk of having to reinvest their coupons at a lower interest rate. If an investor chooses to reinvest all cash coupons back into the bond he or she is currently holding, it behaves similarly to a zero-coupon bond because the investor receives no cash flows until maturity. |
| Related Terms |
| Bond A debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate. |
| Coupon The interest rate stated on a bond when it's issued. The coupon is typically paid semiannually. |
| Indenture A contract between an issuer of bonds and the bondholder stating the time period before repayment, amount of interest paid, if the bond is convertible (and if so, at what price or what ratio), if the bond is callable and the amount of money that is to be repaid. |
| Maturity The length of time until the principal amount of a bond must be repaid |
| Reinvestment Risk The risk that future proceeds will have to be reinvested at a lower potential interest rate. |
| Zero-Coupon Bond A debt security that doesn't pay interest (a coupon) but is traded at a deep discount, rendering profit at maturity when the bond is redeemed for its full face value. |
CAclubindia
