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Fixed Coupon vs Reset Securities


Fixed Coupon vs Reset Securities

Bonds have different characteristics and so respond differently to changes in interest rates.

A fixed coupon bond simply pays the same coupon until it matures.

With a reset security the interest rate being paid changes on set dates according to a set formula. Often the formula is a margin over a reference security or rate such as the 5 year swap.

Sometimes the formula will be different after a period of time expires.

With reset securiuies it is particularly important that before you invest you understand what is likely to happen to the rate and so the income you will receive and value of the security under different economic conditions.

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