High-coupon bonds trading at a premium that tend to fall in price much less than comparable bonds when interest rates rise (hence the cushion effect), because of their high coupons.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.
A callable bond with coupons that are above prevailing interest rates. A cushion bond is more expensive than other bonds. If interest rates rise, the value of a cushion bond depreciates less than other bonds because its interest rate was already high compared to others. However, if interest rates fall, the issuer may call the bond, resulting in less appreciation and a greater prepayment risk.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved