Step-up bond

A step-up bond is a bond whose coupon rate increases at one or more predetermined dates over its life, rather than staying fixed the way a standard bond's coupon does. The schedule of increases, sometimes a single step and sometimes several, is set in advance at issuance and written into the bond indenture, so the future coupon amounts are known from the start rather than depending on a floating reference rate the way a floating-rate note's coupon does.

Step-up bonds are often issued with an initial coupon lower than what a comparable fixed-rate bond would pay, with the promise of higher payments later serving as compensation. They are also frequently structured as callable bonds, giving the issuer the option to redeem the bond before the coupon steps up to a more expensive level, which shifts a meaningful part of the practical risk back toward the investor, since the higher future coupons are not guaranteed to be paid.

For an investor, a step-up bond can be attractive as a partial hedge against rising interest rates, since its own coupon is scheduled to rise over time even if the increases are fixed in advance rather than tied to actual market rates. Because the call feature is so often paired with the step-up structure, evaluating one of these bonds usually means looking closely at both the coupon schedule and the call schedule together, rather than either one in isolation.