Business and Personal Finance Dictionary

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• CUSHION BONDS
  
  An informal name for callable bonds with long maturities that have coupon rates well above current market rates. Because these bonds have such high coupon rates, they trade at prices and yields calculated to the call date rather than to the maturity date. This makes the cushion bond’s price less volatile. If prevailing rates remain the same, fall, or rise to any level not greater than the coupon rate, the bond will offer a competitive return. Even if rates do rise to exceed the coupon rate, the cushion bond offers a higher yield in exchange for its longer maturity since the premium paid at purchase can be amortized over a longer period.
  
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