Also known as a guaranteed coupon reinvestment bond or a multiplier bond, a bunny bond is a type of bond issue that includes the provision for allowing investors to reinvest the coupon payments in other types of bonds that carry the same date of maturity and the same interest rate. One of the benefits of this approach is that the bondholders can reduce the effects on the returns from the bonds when and as average interest rates enter into a downward trend that triggers a decrease in the amount of return generated from the investment. This ability to reinvest is part of the reason for the colorful name of this approach, since it implies the ability to multiply with ease, a trait associated with bunnies.
The nature of the bunny bond is somewhat different than with other types of bond issues. While there are other types of bonds that will allow for reinvestment of the coupon payments, that reinvestment may involve bond issues that offer very different interest rates, including some that may be lower than the rate currently enjoyed. By contrast, the bunny bond specifically stipulates that the reinvestment must involve other bond issues that have the same maturity date and also carry the same rate of interest.
One of the chief advantages of the bunny bond is to protect investors from realizing less of a return than originally projected on the purchase of a bond issue. Since it is possible to reinvest the coupon payments in bonds that are very similar but may be less subject to decreases in interest rates, the degree of risk associated with an already safe investment is actually enhanced. While this approach does require remaining aware of the existence of qualified bond issues and choosing to act at just the right time in order to protect the returns, the effort is often considered worth the time and trouble.
As with any type of investment, there is some risk with a bunny bond approach. In rare occasions, there is the possibility that reinvestment would not yield any real advantage for the investor, or result in protecting the projected returns that the investor had hoped to earn. This would most likely only occur if a major shift in the economy occurred that had negative impact on all bonds that could be utilized in this type of reinvestment strategy, a situation that is highly unlikely to occur. For this reason, a bunny bond is often considered one of the safest options with an investment type that is already considered safe.
