Coupon Step-Up: The Perpetual Bond Clause That Punishes Issuers Who Don’t Call
Last updated: October 2026
A coupon step-up is a contractual increase in a perpetual bond’s interest rate, typically by a fixed margin such as 100 basis points, that automatically applies if the issuer chooses not to redeem the bond at its first call date, designed to discourage issuers from leaving the bond outstanding indefinitely. It is one of the clearest signals in a bond’s documentation about how confident investors can be that a call will actually happen.
Not financial advice. All figures for educational reference only. Data as at October 2026.
Key Takeaways
- A coupon step-up is a pre-agreed increase in a perpetual bond’s coupon rate if the issuer does not call (redeem) it at the first available call date.
- Historically common step-up margins ranged from roughly 1.00% to 1.50%, though actual terms vary by issue.
- Basel III and MAS Notice 637 rules now restrict or prohibit coupon step-ups on many newer bank Additional Tier 1 and Tier 2 capital instruments.
- A step-up reinforces, but does not guarantee, the market’s expectation that an issuer will call at the first opportunity.
- Bonds without a step-up feature carry meaningfully higher extension risk than investors sometimes assume.
What Is Coupon Step-Up?
Perpetual securities have no fixed maturity date, but almost always give the issuer an option to call (redeem) the bond at specified dates, typically starting around five or ten years after issuance. Because investors generally price and trade these bonds assuming a call will happen at the first opportunity, issuers historically included a coupon step-up clause as a form of self-discipline: if they chose not to call, the coupon would increase by a set margin, raising their ongoing cost of capital and creating a financial incentive to refinance and call instead. This made the instrument more attractive to investors seeking a predictable effective maturity, even though legally the bond remains perpetual.
How Does Coupon Step-Up Work in Singapore?
Many SGX-listed corporate (non-bank) perpetual bonds still carry a step-up clause in their terms. Bank capital instruments are a different story: since the introduction of Basel III capital rules, implemented in Singapore via MAS Notice 637, step-ups are now restricted or disallowed for many Additional Tier 1 and Tier 2 instruments issued after certain dates, because regulators want these instruments to genuinely behave like loss-absorbing permanent capital rather than de facto fixed-term debt with a built-in refinancing incentive. Investors must check the specific pricing supplement or offering circular for each issue rather than assuming a step-up exists just because the instrument is labelled “perpetual”.
Coupon Step-Up Example
A corporate perpetual bond is issued with a 4.5% coupon and a first call date in year 5, with a step-up clause adding 100 basis points if not called. If the issuer doesn’t call, the coupon rises to 5.5% from year 5 onward. Facing that higher ongoing cost, the issuer is economically incentivised to refinance and call the bond if market conditions allow it to borrow more cheaply elsewhere — which is exactly the behaviour the step-up clause is designed to encourage.
Advantages of Coupon Step-Up
- Compensates investors if the issuer doesn’t call. A step-up provides additional yield to offset the inconvenience and uncertainty of the bond remaining outstanding longer than expected.
- Signals issuer intent at issuance. Including a step-up clause is itself a signal to the market that the issuer anticipates and intends to call at the first opportunity.
- Reduces (without eliminating) extension risk. The financial penalty makes an issuer more likely to call when it has a genuine economic choice to do so.
- Gives investors a clearer effective-maturity assumption. Even though the bond is legally perpetual, a step-up helps the market treat the first call date as a practical expected maturity for pricing purposes.
Risks and Limitations
- A step-up does not guarantee a call. If refinancing is more expensive than paying the stepped-up coupon, an issuer may still rationally choose not to call, leaving investors holding the bond longer than expected.
- Newer bank instruments increasingly lack step-ups entirely. Regulatory capital rules have removed this feature from many recent bank AT1/Tier 2 issues, so investors in those instruments face materially higher extension risk than they might assume from older market conventions.
- The step-up margin may not fully compensate for lost time value. If interest rates have moved significantly since issuance, a fixed step-up margin agreed years earlier may be inadequate compensation in the current environment.
- Easy to overlook in due diligence. Investors sometimes assume all perpetual bonds behave the same way without checking whether a specific issue actually carries a step-up clause.
Perpetual Bond With Step-Up vs Without Step-Up
| Aspect | With Coupon Step-Up | Without Coupon Step-Up |
|---|---|---|
| Call incentive for issuer | Financial penalty for not calling, encourages timely refinancing | No built-in financial penalty for leaving the bond outstanding |
| Extension risk for investor | Lower, though not eliminated | Higher — issuer has less incentive to call |
| Typical issuer type | Many corporate (non-bank) perpetuals | Increasingly common among newer bank AT1/Tier 2 instruments due to regulatory rules |
| Market pricing convention | Often priced to the first call date as an effective maturity | Requires more caution before assuming an effective maturity at first call |
Source: MAS Notice 637; Basel III capital instrument requirements; general SGX perpetual bond market practice.
The Bottom Line
For Singapore bond investors, a coupon step-up is a useful but imperfect signal — it tilts the odds toward an issuer calling at the first opportunity, but it is not a guarantee, and an increasing share of bank capital instruments don’t carry this feature at all, which is exactly where extension risk needs the closest attention.
Frequently Asked Questions
What is a coupon step-up on a perpetual bond?
It is a contractual increase in the bond’s interest rate, typically by a fixed margin, that applies automatically if the issuer does not redeem the bond at its first call date.
Why do issuers include a coupon step-up clause?
It creates a financial incentive for the issuer to call and refinance the bond at the first opportunity, giving investors more confidence about the instrument’s practical effective maturity.
Do all perpetual bonds in Singapore have a step-up clause?
No. Many corporate perpetuals do, but newer bank Additional Tier 1 and Tier 2 capital instruments increasingly lack step-ups due to Basel III and MAS Notice 637 regulatory restrictions.
Does a coupon step-up guarantee the issuer will call the bond?
No. The issuer still has the option, not the obligation, to call — if refinancing is more expensive than paying the stepped-up coupon, the issuer may choose not to call.
What is a typical coupon step-up margin?
Historically, step-up margins of roughly 1.00% to 1.50% were common, though actual terms vary by issue and should be checked in the specific offering document.
How does the absence of a step-up affect investor risk?
Without a step-up, the issuer has less financial incentive to call, which increases the extension risk that investors might hold the bond longer than they initially expected.
