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Ratchet Bond

A rate-adjustable debt instrument that has a coupon rate that adjusts periodically at a specific spread over a non-money market reference rate such as the 10-year CMT rate. However, it can only adjust downward based on a given coupon formula. One the coupon rate is adjusted down, it cannot be readjusted up if the reference rate changes course and moves up. Essentially, this bond allows investors to replicate the cash flow pattern created by a series of standard callable bonds.


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