Bonds are some of the safest investment products out there, and they’re a spectacular option for anyone seeking passive income. Unfortunately, many bonds have high face values that make them prohibitive to retail investors. For defensive investors who don’t have thousands and thousands of dollars at their disposal to invest in bonds, baby bonds are an option.
Baby bonds are a nickname for any bond issued with a par value under $1,000. They’re designed to attract retail investors by offering a lower barrier to purchase alongside coupon rates that are ideal for generating passive income. They’re relatively common and can be a great addition to conversative portfolios or those seeking to mitigate risk through investment debt instruments.
Here’s a closer look at baby bonds and why they’re such a popular investment for fixed-income investors and retail investors seeking bond exposure.
A Closer Look at Bond Face Values
The appeal of baby bonds is their low face (par) value. They’re issued for less than $1,000, which makes them lower than virtually every other debt instrument investment option. By comparison, institutional bond par values are as follows:
Baby bonds can range from as low as $25 up to $1,000, with most coming in denominations of $100. This low par values makes them accessible to investors. For example, an investor with $5,000 may only have purchasing power for five corporate bonds with a par value of $1,000 each. However, they could instead also invest in 50 baby bonds with par values of $100.
Where to Find Baby Bonds
Baby bonds are a product of either corporations or municipalities issuing debt to fund new initiatives. Many times, they come in the form of municipal bonds—called “muni bonds.” Like treasuries, they’re tax-exempt. However, they’re also often zero-coupon bonds, which negates their purpose as passive income investments. Muni bonds tend to have a maturity of 8-15 years.
Many corporations also issue baby bonds. They’re a common product of utility companies, investment banks and telecoms who need to fund new ventures or kickstart new revenue streams. Corporate baby bonds are often callable, which means they tend to have a high coupon rate: as much as 5-8%. These are the bonds fixed-income investors tend to pursue.
What is the Purpose of Baby Bonds?
Baby bonds are specifically useful for small-to-midsized projects that might not otherwise garner a lot of attention from institutional investors. The issuer releases baby bonds as a way to drum up interest from retail investors.
For example, a $5 million corporate project might usually yield 5,000 bonds with par values of $1,000. This is typically too small of a quantity …….
