In finance, cushion may have several meanings:
Cushion refers to the period of time before a bond reaches maturity. During this period, a bond cannot be called, and investors receive interest payments.
Cushion in a Company’s Account
Cushion may also refer to a reserve account in a company’s financials, set up for the purpose of paying off bad debts.
A Higher-Priced Bond
Alternatively, the term cushion may also refer to a kind of bond which is usually priced slightly higher. The higher price is mainly because of this kind of bond includes a provision allowing the bond issuer to repurchase the bond or security at a price which is more or less equal to the current price. Also, coupon payments are higher than the typical rates offered in the market.
Cushion bonds are known for having high current yields and are not susceptible to increases in price. These are high-coupon bonds, which also means that if price changes do occur, they are not very drastic. In the event of a rise in interest rates, the value of a coupon bond should not depreciate drastically.
On the other hand, should interest rates fall, the value of the cushion bond does not appreciate as much a regular bonds. This is because with cushion bonds, there is always a risk that the issuer will call the bond. As such, conservative investors who wish to enjoy higher returns may choose to purchase cushion bonds.