Setup Bond

A set up bond can be defined as a bond that pays an initial coupon rate at the first maturity period of the bond and then it offers a high coupon rate at all of the other maturity periods of the bonds. A set up bond is a kind of bond in which all the future coupon or premium payment are received at a higher rate subsequently from the previous or current maturity periods of the bond. These bonds can be purchased by the individual and or the portfolio manager that want to maintain a fixed income security at a predefined rate having the same features as offered by the TIPS but with a higher coupon rate with subsequent maturity period.

The name given to the setup bond is due to the reason the price or the coupon rate of the bond literally increases or sets up from one period in the next period. For example a bond of a maximum age will pay 4 percent coupon rate in the initial two years and then from the next year the coupon rate may increase to the 6 percent and keeps on increasing in the remaining life year of the bond.


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