“Baby bonds”, “exchange traded debt”, “ETD” or just plain “bonds” is how we refer to debt instruments that are traded on exchanges that are more typical for common stocks.
The securities we follow and are most typically called “baby bonds” are debt instruments with face values of $25, $50 or $100. Specifically any debt that is exchange traded with a face value of less than $1000 is a “baby bond”.
They may be labeled Notes, Senior Notes, Debentures, Junior Debentures or any of a number of different names, but for the most part they are the same. They are junior to secured debt, and senior to common and preferred stock in the capital stack.
Income received on Baby Bonds is interest and thus if held in a taxable account the income will be taxed at ordinary tax rates.
Maturity dates on baby bonds typically range from as little as 2 years all the way up to 100 years. Business Development Companies (BDC’s) normally issue the shortest maturity baby bonds, while utilities issue those with the longest maturities.
Just like preferred stock the value of a baby bond will fall if interest rates move higher. This is simply because the interest rate “demanded” by a bond holder will be higher if competing investments are paying higher returns. Bonds with the longest dated maturity will fall the most and it would not be unusual for a baby bond with a 20-100 year maturity to fall by 30-40% during a time of rising interest rates. Those baby bonds with maturities which are 2-10 years in the future will maintain a fairly firm price as interest rates rise and if they fall below liquidation preference ($25) will begin to rise toward $25 as the issue approaches maturity.
Short/Medium Maturity Income Issues
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