Baby bonds are fixed income securities issued with a par value of less than $1,000.
The most common issuers of these bonds are municipalities, counties, and states, which use them to finance infrastructure projects. These municipal bonds are generally not taxed. They are usually structured products with a zero-coupon and a maturity of 8 to 15 years.
Baby bonds may also be issued by corporations. Their issuers may include utility companies, investment banks, telecommunications companies, and business development companies.
Lower denominations are more attractive to retail investors. Baby bonds can serve to increase bond demand and liquidity. Their small denomination can attract small or retail investors who do not have the means to purchase a standard $1,000 denomination bond.
Typically, baby bonds are unsecured. Another feature is that they are
callable.
Savings bonds can also be classified as baby bonds. In the United States, from 1935 to 1941, the U.S. government issued war bonds at 75% of par. The $25 bond sold for $18.75 with a 10-year maturity.
In the UK in the 1990s, baby bonds were an incentive for parents to save for their children. That is, parents paid in monthly contributions for at least 10 years, and, in return, each child received a guaranteed, tax-free amount when he or she turned 18.