What is a Baby Bond?

Malcolm Tatum

The baby bond is a bond issue that has a face value that is under the amount of $1,000.00 in United States Dollars (USD). Generally, these types of bonds are designed to appeal to smaller investors who may be willing to invest a smaller sum of money in an issue, with the promise of a more modest return on the investment.

Businessman giving a thumbs-up
Businessman giving a thumbs-up

Often, companies that do not have ready access to larger investors utilize the baby bond approach. Access may be limited due to the fact that the company operates in a small niche market, or the total amount of funds that the company wishes to raise is not a large enough investment opportunity to generate interest among institutional investors. Smaller towns may also employ the use of a baby bond approach when seeking to raise money for an upcoming project. The baby bond strategy is often ideal when local residents want the opportunity to participate in the bond issue, but may not have a lot of disposable income to invest in the venture.

While the baby bond may appear to be a great solution for small investors, the advantages are often outweighed by the liabilities associated with the issue. Often, the baby bond method involves higher administrative costs per bond, as well as a higher overall cost for distribution and processing. This increased cost will impact the amount of interest that will be offered as part of the bond issue, resulting in a lower rate of return for the investor who chooses to purchase the bond. In addition, the baby bond is not included as part of the active market that carries a guarantee of liquidity, which may also lessen the appeal.

Still, a baby bond is a great way for people with limited disposable income to get into the bond market, and make a little profit in the process. While the rate of return on a baby bond is generally modest, the venture still has a better rate than most standard savings accounts.

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