A step-down bond is a debt security whose coupon rate decreases during its life, either on dates fixed at issue or when a defined event occurs. A scheduled example would pay 6 per cent for the first three years and 4 per cent thereafter, with the changes written into the coupon schedule. It is the reverse of a step-up bond and differs from a fixed rate bond, which pays the same rate throughout.
Scheduled step-downs give investors higher income early on and suit issuers that expect their financing needs or interest costs to ease. Conditional step-downs reward the issuer for an improvement: the coupon may fall if its credit rating is upgraded, often reversing an earlier step-up, or, in some sustainability-linked structures, if environmental targets are met. For investors the main drawback is falling income, usually at a time when the bond cannot be sold at a premium. Yield measures therefore use all scheduled coupons, not the first.