Flip-Flop Note

Imagine a world in which we could buy bonds that were backed by two different debt types. Imagine that we could decide which of those debt types we wanted to be paid from: the one with the fixed interest rate or the one with the variable interest rate. And now imagine, in this world, this beautiful world, that we could change our preference to coincide with whichever debt type was going to earn us more money.

Friends, we don’t have to imagine anymore, because this world already exists. It’s the world of flip-flop notes, and it’s here to make our fixed-income security dreams come true.

Flip-flop notes work just as we described above: they allow us to choose how our debt security pays us. We can go with the variable rate if interest rates are high; we can switch to the fixed rate if interest rates drop and the fixed rate would be more profitable for us. Then, when the security matures, we get our principal back. (For those who were hoping “flip-flop notes” were some kind of musical footwear we could wear to the beach…no.) Sometimes we have specific date ranges in which we can flip or flop, but sometimes we can flip—or flop—whenever we feel like it.

Flip-flop notes might require a little more TLC than other fixed-income securities in our portfolio, because we’ve gotta pay attention to whether we want to be flipping or flopping at any given time. But when they yield us enough dough to finance taking our flip-flop game to the beach—we’re talking footwear and financials—then we feel like the extra time and attention will all have been worth it.