Reset Bond

Reset Bond

A bond that, on designated days, increases its coupon rate to bring its market value back to its original value. For example, suppose a bond is issued with a price of $1,000 at a coupon of 5%. If the bond's price declines for any reason to $900 by the first designated day, the coupon rate is increased to 7% or whatever percentage will bring the price back up to $1,000. Reset bonds are structured this way to protect bondholders' investment, but they can create hardship for the issuer. The extra coupon rate has been known to cause an issuer to go into bankruptcy.
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Putable/callable reset bonds. Term-enhanced remarketable securities -- or TERMS, for short.
If remarketing is necessitated, this means at least part of the up-front cost savings the treasurer thought the putable/callable reset bonds offered will be lost.
Andrew Kalotay, president of consultant Kalotay Associates believes Nabisco would have faced a $100 million mark-to-market loss had the DIG ruled that putable/callable reset bonds needed to be bifurcated and marked to market.
RESET bonds have interest rates which are adjusted at fixed dates if the market value of the bond falls below a set threshold.
The use of payment-in-kind and RESET bonds may also signal that the firm anticipates future changes in its operating performance (Crabbe, Pickering, and Prowse |11~ and Van Horne |41~).