Definition:
A baby bond is a type of corporate bond issued by a large, financially stable company, typically a subsidiary or division of a parent company. They are often issued with shorter maturities and lower coupon rates than traditional corporate bonds.
Key characteristics of baby bonds:
- Issuer: Typically issued by subsidiaries or divisions of large, financially stable companies.
- Maturity: Shorter maturities compared to traditional corporate bonds.
- Lower coupon rates: Often offer lower coupon rates than traditional corporate bonds.
- Lower risk: Due to their shorter maturities and the financial stability of the issuer, baby bonds are generally considered to be less risky than traditional corporate bonds.
Why are baby bonds popular?
- Lower risk: Baby bonds offer a lower risk profile compared to traditional corporate bonds.
- Regular income: They provide a steady stream of income through coupon payments.
- Liquidity: Baby bonds are often more liquid than traditional corporate bonds, making them easier to buy and sell.
However, it’s important to note that while baby bonds are generally considered to be less risky than traditional corporate bonds, they are not risk-free. Like any other investment, baby bonds carry the risk of default.
In essence, baby bonds are a type of corporate bond that offers a lower risk profile and a steady stream of income. They are a popular investment option for investors seeking a relatively safe and stable return.
