What is a baby bond?
A baby bond is a debt security issued in small face amounts (par values under $1,000). The low denomination makes these bonds accessible to individual retail investors who might not be able to buy standard $1,000 bonds. Baby bonds can be issued by governments (municipalities) or by corporations; structure and features differ by issuer.
Key features (quick definitions)
– Par value (face value): the stated amount the issuer promises to repay at maturity for each bond certificate.
– Maturity: the date when the issuer repays the par value.
– Zero-coupon bond: a bond that pays no periodic interest; it is issued at a discount and repays par at maturity.
– Coupon rate: the annual interest rate the issuer pays on a coupon bond, expressed as a percentage of par.
– Callable: a bond feature that lets the issuer redeem the bond before its maturity date; interest payments stop when a bond is called.
– Unsecured debt: debt not backed by specific collateral; unsecured holders are paid after secured creditors if the issuer defaults.
How baby bonds are used and how they differ
– Municipal baby bonds: Often issued by cities, counties, and states to finance infrastructure and capital projects. Those municipal baby bonds are commonly structured as zero-coupon issues, have maturities commonly in the 8–15 year range, are typically tax-exempt for investors, and are usually investment-grade (roughly A or better).
– Corporate baby bonds: Issued by companies (utilities, banks, telecoms, business development companies, etc.). These are typically unsecured, may carry relatively high coupon rates (commonly in the mid-single digits to high single digits), and are frequently callable. Firms use baby bonds to create a smaller-denomination issue that attracts retail buyers and increases market liquidity for a small overall borrowing amount.
Seniority and risk
Baby bonds generally sit above preferred shares and common equity in the creditor hierarchy but below secured debt because many baby bonds are unsecured. If the issuer defaults, baby bondholders may only be repaid after secured lenders are satisfied.
Historical and regional uses
– United States (historical): The term also describes a series of small-denomination U.S. government savings bonds issued 1935–1941. Those were sold at 75% of face value, had 10-year maturities, and were tax-exempt.
– United Kingdom: “Baby bond” has also been used for a government-backed savings product launched in the late 1990s to encourage parental saving for children—small monthly contributions over at least 10 years in exchange for a guaranteed minimum tax-free payout when the child reached age 18.
Worked numeric examples
1) Issuance size and number of bonds (from the issuer’s perspective)
– Suppose a borrower needs $4,000,000.