Ratchet bond (Rate adjustable bond)
Category — Bond Types
A Ratchet bond (Rate adjustable bond) is a rate-adjustable bond that has a coupon rate that adjusts periodically at a fixed quoted margin over a non-money market reference rate. However, it can only adjust downward based on a coupon formula. Once the coupon rate is adjusted down, it cannot be readjusted up if the reference rate subsequently increases. Essentially, this bond allows investors to replicate the cash flow pattern created by a series of standard callable bonds.