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What is a Bunny Bond?
A bunny bond is a type of bond or an investment that offers investors the option to reinvest payments or dividends. The investors can reinvest the payment to secure additional bonds. Usually, bonds with the same coupon and maturity are reinvested in. However, this does not mean that investors who prefer to receive their dividends in cash cannot do so. This is why it gives an option, investors can choose to receive cash payment or recycle the dividends to buy additional bonds. A bunny bond is also referred to as a multiplier bond or a guaranteed coupon reinvestment bond.
How Does a Bunny Bond Work?
A reliable avenue through which investors recycle coupon payments is a bunny bond. Investors can secure additional bonds. This offer is not compulsory, it is an option, investors can decide whether or not to reinvest their coupon payments. Investors who seeks protection from reinvestment risk or lower interest rates do find bunny bonds as appealing arrangements. Reinvestment risk has impacts on the interest rates of bonds, interest rates decline often amount to loss for investors. A bond's yield to maturity (YTM) can also be affected by reinvestment risk. The calculation of YTM for any bond is based on the belief that future coupon payments will be reinvested at higher rates that when it was initially purchased. However, reinvestment risk is one that holds that future coupons will be reinvested at a lower interest rate than when the bond was originally purchased.