Municipal Convertible

STAIRS

A convertible municipal bond. STAIRS are zero-coupon bonds that may be converted into interest-bearing bonds. Zero-coupon bonds are sold at a discount, and, because they do not pay interest, they are more volatile in the secondary market. A bondholder may thus wish to convert STAIRS to interest-bearing bonds in order to lock in a certain return. On the other hand, more risk tolerant bondholders may wish to hold the bond in the belief that a fluctuation in interest rates will make the bond more valuable. Like all municipal bonds, STAIRS are exempt from federal taxes. They are also called municipal convertibles.

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municipal convertible

A unique municipal bond that is issued at a large discount from face value because it pays no interest until a specified date, at which time interest payments begin and continue until maturity. For example, a bond issued in 1988 and due in 2015 might begin paying interest in 1998. Essentially, a municipal convertible is a combination of a zero-coupon bond and an ordinary interest-paying bond. Municipal convertibles are traded under a variety of acronyms including BIGS, CCAB, FIGS, GAINS, PACS, STAIRS^® , and TEDIS, depending upon the underwriter of the particular issue.