Cushion bonds are callable bonds with coupon rates that are higher than the market interest rate. These bonds sell at a premium and tend to be resilient to fluctuations in interest rates, making them ideal for conservative investors looking for reduced volatility.
For example, cushion bonds are coming back into style after the dramatic fall in interest rates since these lower rates meant less appreciation for cushion bonds than traditional bonds. These bonds now offer bondholders the ability to mitigate the risk of rising interest rates.
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