All About Fairway Bonds

Fairway bonds are an investment that offers variable returns based on a selected interest rate such as the prime rate, Treasury bill rate, or London Interbank Offered Rate (LIBOR).

Definition

Fairway bonds work in a way that is analogous to golf. In golf, if a ball stays on the fairway, a golfer has a chance at winning, but if the ball lands in the rough, his chances of winning decrease. The interest rate of a fairway bond is like the fairway in golf; as long as the interest rate is within a certain range, the chances of making a decent yield or return are high. As soon as interest rates move outside of a certain range, like a ball going into the rough, the chances of an investor making a good return decrease.

Other Terms

Fairway bonds are also called, “index floaters,” “range accrual notes, ” “ corridor bonds,” or "index range notes".

Appeal

Fairway bonds are appealing to investors because, unlike traditional bonds, interest is calculated at a variable rate. As long as the interest rate remains in a certain range, the yield will remain high. If the interest rate falls out of the range, investors may not make interest for a length of time but they also won’t lose the principle, or initial funds invested.

Considerations

As with all bonds, you are loaning money to someone when you purchase a Fairway bond. In return for the loan, you are paid interest. Although you won’t be able to predict the exact yield on a Fairway bond, it’s possible to obtain a fairly strong estimate based on current market knowledge and trends.

You are guaranteed to receive the face value of a Fairway bond at maturation. However, you can still lose money relative to the market because you didn’t invest it elsewhere. How often interest is paid, how long it takes for the bond to mature, and whether or not you can resell or find a secondary buyer depends on terms agreed upon when you initially purchased the bond.