A STEP UP Agency debenture is a bond that has a fixed coupon rate for a period of time. It is then available to be “called” (redeemed @par) by the issuing Agency. If the note is not called, the coupon will then STEP-UP (adjust) to a new coupon rate. These various coupons and the amount of time between the step dates are established at the issuance and will not be changed over the life of the bond. (A Step-Up Bond is not considered a true floating rate security because the coupons are pre-determined at issuance and do not “float” against a market index).
Keep in mind that each STEP-UP bond will have its own specific call features and coupon step-up features. Some recent issues have had multiple step-up dates with the coupon rate changing each year through maturity if he bond is not called. In any event, the best method of evaluation is to examine the effective yield to each available call date (taking into account the multiple coupons) and then comparing to alternative investments.
Book Recommendations
The Handbook of Fixed Income Securities
Keep in mind that each STEP-UP bond will have its own specific call features and coupon step-up features. Some recent issues have had multiple step-up dates with the coupon rate changing each year through maturity if he bond is not called. In any event, the best method of evaluation is to examine the effective yield to each available call date (taking into account the multiple coupons) and then comparing to alternative investments.
Book Recommendations
The Handbook of Fixed Income Securities
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