Bunny bond is a type of bond on which there is an opportunity for the investor to reinvest coupon payments. Holders can reinvest the coupon payment into an additional bond issue, most commonly a funge. Reinvestment occurs mainly in bonds with the same coupon and maturity. However, this does not mean that investors who prefer to receive coupon payments cannot receive coupon income. Thus, investors can choose between receiving a coupon payment or reinvesting, that is, this option is actually a kind of put option. A bunny bond is also called a multiplier bond.
Investors seeking protection from reinvestment risk due to lower market interest rates than they earn coupons may find bunny bonds attractive. Lower interest rates often result in losses for investors. Reinvestment risk can also affect a bonds yield to maturity (YTM). The YTM calculation for any bond is based on the belief that future coupon payments will be reinvested at rates greater than or equal to the original purchase rate. Accordingly, the risk of reinvestment is that future coupons will be reinvested at a lower interest rate than when the bond was originally purchased. One way to avoid this undesirable scenario is to reinvest coupon payments in additional bonds with the same coupon and maturity, which they can do if they have a bunny bond.
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