Baby bond
The term refers to fixed-income securities whose face value (also referred to the 'par value') is less than $1,000, but typically range in between $25 and $500.
In comparison with other fixed income instruments, baby bonds are tax exempt and are commonly issued by municipalities, counties, and states to fund expensive infrastructure projects and capital expenditures.
Due to their public function, baby bonds are normally zero-coupon bonds with a maturity of eight to 15 years. However, even 50-year bonds are available in the market, meaning that no payment is made between the bond’s issuance and its date of maturity.
Due to the perceived financial stability of their issuers, baby bonds are assumed to be reliable and low-risk investments that can be used as diversification instruments in a less risk averse portfolio.
Benefits of baby bonds
- Highly liquid thanks to lower prices and higher rating
- Available to investors with smaller funds
- Tax free
Drawbacks of baby bonds
- Majority of government baby bonds are callable, meaning that the issuer can call them back and return the principle at any moment, which adds a degree of uncertainty to long-horizon investors
- Smaller issuers bring greater default risk – an important aspect considering investing in corporate baby bonds
- Relative to lower face value cost, they may not pay off in terms of associated administrative costs.
