Series 50: Capital Appreciation Bonds

Capital Appreciation Bonds

A capital appreciation bond (CAB) is a bond that does not pay out interest until the bond matures. A CAB is like a zero coupon bond, but the interest is compounded rather than accreted each year. CABs are usually issued at a deep discount to their par value. For example, a $5,000 par value bond, may be issued at $2,000. CABs can be appealing to issuers with debt limits because at issue, only the discounted value counts against the debt limit. CABs can also be appealing because repayment of principal and interest is not due until maturity and CABs tend to have longer maturities. Conversely, CABs are usually not callable and they tend to be more expensive overall than trad