A bond which is typically issued with a special provision allowing the initial interest to be reset on specified dates so that the bond would trade at its issue value. Although a reset provision can serve an issuer by lowering rates if market rates decrease or credit quality improves, it particularly works as a protective feature for investors to render junk bond issues more attractive to investors . If market rates rise or credit quality deteriorates (pushing prices downward), the interest rate would be increased to readjust the bond price to par or above. In this sense, a step-coupon bond is similar in structure to a deferred-interest bond (DIB) except that it is initially issued with a low coupon interest, which is later readjusted upward. A step-coupon bond may have an embedded call option which the issuer can exercise as the coupon level rises.
This bond is also known as a reset bond.
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