The term “backup” commonly refers to the detrimental change in a bond’s yield and price before it is issued by a company. This term is actually jargon used by bond investors

The price of a bond backs up when a company finds the security more costly or less lucrative to issue than it had anticipated. A backup is usually caused by an unexpected change in interest rates and there are niche software for financing that are needed in any company.

The word “backup” is also used to describe a transaction in which an investor sells one bond to buy another, or it may denote a short-term price trend.

KEY TAKEAWAYS
A backup is trader’s slang for an unfavorable change in the yield, spread, or price of a bond before it is issued.
Usually caused by a change in interest rates, a backup can damage a company’s effort to raise cash from the bond issue,
To compensate, companies need to raise the coupon on their bond issue or to sell their bonds at a discount.
The word backup may also describe the sale of a long-term bond to facilitate the purchase of a shorter-term bond to benefit from interest rate changes.
A short-term price reversal in the markets overall may also be described as a backup.
How Backups Work
The term backup is lingo used by bond investors. In the bond market, a backup occurs when yields rise prior to issuance and offering price or coupon (interest) must be adjusted to compensate for the increase in required yield. A yield is the return paid on an investment and is generally expressed as the interest rate paid on the bond. When bonds’ yields rise, their rate of return rises. This means that effectively more money is paid out in interest relative to the price of the bond, which decreases. Thus, when yields rise prior to issuance of a bond, the issuer has to decide whether to increase the coupon (interest) rate they are willing to offer bondholders, or lower the price of the bond below par.

For instance, if interest rates increase, the required yields on newly issued bonds will rise with them. This forces a company that has yet to issue bonds to raise the coupon on its bond issue, which increases its cost of debt. The other option is for the company to sell its bonds at a discount and reduce the amount of cash it raises from issuing (selling) the bonds.

 

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