Baby Bonds Definition
Baby Bonds Meaning
A baby bond has two special purposes. First, baby bonds are able to bring smaller investors into the market allowing companies to benefit from another source of cash. The second purpose is to provide funding for smaller companies who do not have access to the larger institutionalized markets.
Baby Bond Example
Sarah has $600 that she would like to invest in debt instruments. However, the amount is not enough for her to invest in a bond with a $1,000 face value. She hears about baby bonds from a friend and decides to invest in one $500 face value bond and four $25 face value bonds. Both of them pay the same interest rate at 5%, semi-annually. This is much more beneficial to Sarah because she can get a higher interest rate through baby bonds than she can when she is investing in a certificate of deposit or savings account.