What are ‘Residual Interest Bonds – RIBS’

A Residual Interest Bond (also known as an inverse floater or inverse floating-rate bond) is a bond created by the split of income from a municipal bond into two securities: a residual interest floating-rate bond and a primary-direct floating rate bond. The resulting floaters will reverse relationship to a reference interest rate such as LIBOR. The income from the municipal bond is then used to pay the coupon on the direct floater and any remaining income will go toward the residual interest bond.

BREAKING DOWN ‘Residual Interest Bonds – RIBS’

RIBs enable municipal bond funds to promise higher current yields to their buyers. But if rates on municipal bonds rise, holders of RIBs will now own bonds that will pay a lower coupon, which could make the value of the bonds fall rapidly.

Anyone who buys a residual-interest bond gets a better interest rate than would be provided by a conventional municipal bond, but at the…