Lesson 3 of 7 · All lessons in this module
- Bullet, fully amortizing and partially amortizing bondsVideo lesson
- Sinking funds, waterfalls, zero-coupon and deferred coupon bonds
- Floating, step-up, credit-linked and PIK coupons
- Index-linked and inflation-linked bonds
- Callable and putable bonds
- Convertible bonds, warrants and contingent convertiblesVideo lesson
- Domestic, foreign and Eurobonds; tax considerations
Lesson 3 of 7 · 13 min
Floating, step-up, credit-linked and PIK coupons
A coupon need not be fixed: it can reset with a market reference rate, rise on a schedule or after an event, depend on the issuer's credit metrics, or be paid in extra bonds instead of cash.
In short
- FRN coupon = MRR + credit spread, reset each period; principal is usually repaid at maturity like a bullet.
- FRNs carry less interest rate risk than fixed-rate bonds but the same kind of credit risk.
- Step-up bonds: the coupon rises by set margins on set dates, or after a specified event.
- Credit-linked coupons: the spread rises if credit metrics or ratings worsen; common in leveraged loans.
- Payment-in-kind (PIK): interest is paid by adding to principal instead of in cash; it carries a higher rate.
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