Bonds that offer a lower coupon rate than the market interest rate for a similar bond at the time of issue Original issue discount bonds
Bonds that must increase the bond’s coupon rate if the company’s rating is downgraded Step-up provision in bonds
Suppose you invested in company A’s bonds and the company used a large amount of that debt to acquire another firm. (Such a deal is called a leveraged buyout.) This deal led to significant losses for bondholders and had a negative impact on the firm’s credit risk.
In such a situation, the company’s bond rating is likely toincrease , the yield to maturity will increase , and the value of its outstanding bonds willincrease .
Due to the impact that sudden events could have in the value of bonds, event risk covenants, or provisions, are included in the issuance of some corporate bonds.
This covenant allows the issuer to pay off the remaining debt early. The issuer can call its outstanding bonds at a call price equal to the market price of a similar noncallable bond. Such a covenant is called a make-whole call provision .