Cushion Bond

Some investors are terrified of losing money. So genius alchemists in the world of finance came up with a way to put bubble wrap around the portfolios of these anti-risk takers, producing what is known as the “Cushion Bond.”

Cushion bonds are callable bonds that have much higher interest rates than traditional bonds, like the 30-year Treasury. The goal for the investor is to protect herself from rising interest rates by providing a “cushion” between the bond’s rate and changes in borrowing rates in the broader economy.

Because of this “cushion,” an investor can expect to pay a higher price for a higher rate. The investor is limiting her downside with these bonds, but the upside potential is equally limited.