- Posted on February 03, 2020
- Financial Terms
- By Glory
These are income fixed securities available that are usually sold for smaller dollar rates typically for $500 or less. Baby bond is very popular among average investors as a result of its small investment rate. A baby bond can also be described as a series of low denomination saving-bond issued by the US government with a face value from $75 to $1,000. They have a maturity of 10 years and sold at a face value of 75%.
Break Down Of Baby Bond
Baby bonds are issued specifically by counties, municipalities, and states in order to fund capital expenditure and costly infrastructure projects. The securities are tax-exempt with a maturity period of five to fifteen years. The bonds are also zero-coupon and are often rated as an A-bond or with a better term in the bond markets. No commission is made for purchase. When an investor wants to get this security, he or she goes directly to the state treasury office or the issuing city.
Aside from the already listed department where baby bonds are sold, they can also be gotten from business organizations as corporate bonds. Corporate issuers in this category include investment banks, utility companies, telecoms companies, and business development companies with the task of funding mid-sized and small businesses. However, the price of the bond from the corporate issuer is often determined by these three conditions, the financial capacity of the issuer, the available market data for the company and the credit rating of the company.
Reasons Why Companies Engage In Baby Bond
Companies that do not operate large debt securities or are not allowed to operate large debts can choose the baby bond as a way to generate demand and liquidity for the bonds.
Companies usually engage in baby bonds in other to attract average or small investors who might not have the ability to go for securities with prices from a $1000 par value bond.
To make more interest. Take, for example, an entity that wants to borrow money by issuing bonds that are worth $4 million. The size of the security might stand as an impediment to making much interest from the bond. Assuming the bonds are $1000 per face value, it means that the company would only be able to sell 4,000 bonds in the bond market. However, if the company operates baby bonds of $400 face value. Retail investors would be able to access the securities at an affordable price and the company would be able to sell as many bonds as $10,000.
When a baby bond security is sold to a buyer, he or she can choose to manage this himself or herself by keeping them safe and keeping track of their maturity until it is time to cash out. Another option of keeping the baby bond is to use a management service.
Generally, baby bonds are categorized as unsecured debts. This implies that there is no collateral to guarantee principal repayment and interest payment for default. Hence, if the issuer default in terms of his or her payment obligation, the baby bondholder would only get her money when the secured holders' claims are met.
In relation to the laid down standards for a debt instrument, a company's common stock and preferable shares are junior to baby bond.
Features Of A Baby Bond
The most basic feature of a baby bond is that they are callable. The bond can be redeemed early before maturity. However, to compensate the bondholder for the event of callable bonds, the bonds have a high coupon rate of about 5-8 percent.
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