Investments, tenth edition

  Innovation in the Bond Market 

 Issuers constantly develop innovative bonds with unusual features; these issues illustrate 

that bond design can be extremely flexible. Here are examples of some novel bonds. They 

should give you a sense of the potential variety in security design. 

  Inverse Floaters   

These are similar to the floating-rate bonds we described earlier, 

except that the coupon rate on these bonds  falls  when the general level of interest rates 

rises. Investors in these bonds suffer doubly when rates rise. Not only does the present 

value of each dollar of cash flow from the bond fall as the discount rate rises, but the level 

of those cash flows falls as well. Of course, investors in these bonds benefit doubly when 

rates fall.