Step Up Bond

A bond with a coupon that increases over time on schedule - unless the issuers call it. Ordinarily, the coupon begins slightly above the going rate for short-term bonds and the bond is callable at par on each coupon reset date. At the last reset date, the issuer has an option to call the bond. At each previous reset date, the issuer can either call the bond or pay a forward premium (the excess of the next coupon(s) over the going market coupon) for the current installment of a compound option. Thus, the Step Up Bond has a sort of embedded Chooser Option. These bonds are available with different credit qualities. Issuers include federal agencies, blue chip corporations, and lesser corporations The Step Up Bond embodies interest rate risk and exposure to the volatility of the rates, and may embody credit risk. This risk can be a significant issue.