What is the Difference Between Term and Serial Bonds?

All the bonds in the issue reach maturity and must be paid off in a lump sum at the same time. The one maturity date is what distinguishes term bonds from serial bonds. A term bond usually carries a sinking fund requirement where the issuer sets aside reserves each year to provide for retirement of bonds. Except for being tax exempt, term bonds are quite similar to standard corporate debt. An example of a term bond is when a company issues $1 million worth of bonds, all maturing 15 years from the date of issue.

• The interest payment (“coupon payment”) divided by the current price of the bond is called the current yield (this is the nominal yield multiplied by the par value and divided by the price).
• Investopedia also defines the details of a serial bond in another segment.
• A term bond can be contrasted with a serial bond, which has various maturity schedules set at regular intervals until the issue is retired.
• An example of such a project is a sports stadium with serial bonds sold for the funding.
• A callable bond can be redeemed by the issuer at a price that has been predetermined and agreed upon by both the issuer and the purchaser.

The yield and price of a bond are inversely related so that when market interest rates rise, bond prices fall and vice versa. Serial bonds with balloon payments happen more frequently in the high-yield corporate bond market. Just as homeowners sometimes have mortgages with balloon payments, some corporations structure their debt in a similar way.

Principal

In recent years, as bond market rates and inflation started to rise, both parts of the I bond rate started to fluctuate more, lifting the composite rate significantly. Both earn interest monthly for 30 years, and they have the same redemption and tax rules. A number of bond indices exist for the purposes of managing portfolios and measuring performance, similar to the S&P 500 or Russell Indexes for stocks. The most common American benchmarks are the Bloomberg Barclays US Aggregate (ex Lehman Aggregate), Citigroup BIG and Merrill Lynch Domestic Master.

Investors who purchase term bonds receive periodic interest payments, typically on a semi-annual basis, until the bond reaches its maturity date. For example, an issuer may choose to release 500 bonds which mature gradually, with payments due annually for five years. In this way, the issuer can prevent a balloon maturity because the bonds will not require the issuer to turn over one enormous lump sum payment when the bonds mature.

A call feature, or call provision, is an agreement that bond issuers make with investors. This agreement is written in a document referred to as an indenture, which explains how and when the bond can be called, including the multiple call dates throughout the bond’s life. Thus, the issuer of a callable bond can redeem the bond at a predetermined price, at specific times before the bond matures. The time from issuance to call date(s) represents the bond’s active term.

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This can be damaging for professional investors such as banks, insurance companies, pension funds and asset managers (irrespective of whether the value is immediately “marked to market” or not). One way to quantify the interest rate risk on a bond is in terms of its duration. In some instances, market participants invest in serial bonds with balloons as a way to generate incremental yield for their portfolios. Considerable research into the underlying fundamentals of the issuer must be performed before undertaking such an investment. Let’s say this same company has a $200,000 serial bond with a balloon payment, with a coupon rate of 8%. The company must pay $20,000 every year toward the face value of various serial bonds.

They buy the bonds to match their liabilities, and may be compelled by law to do this. Still, in the U.S., nearly 10% of all bonds outstanding are held directly by households. The interest payment (“coupon payment”) divided by the current price of the bond is called the current yield (this is the nominal yield multiplied by the par value and divided by the price). There are other yield measures that exist such as the yield to first call, yield to worst, yield to first par call, yield to put, cash flow yield and yield to maturity.

According to their website, term bonds come due or mature on a single date. Serial bonds differ in that they come with various maturity dates that are spread out over a period of several years. They’re referred to as serial bonds because of the staggered maturity dates. Unlike term bonds, serial bonds do not use sinking funds as security. Funds for repayment of the bond are used from the revenues generated from the project that has been funded by the sale of the bonds.

How Do Series I Bonds Work?

Term bonds may come with a sinking fund requirement, where the company sets aside an annual fund to repay the bond. Some companies also offer “secured term bonds” in which they promise to back their bond with company collateral or assets, in case they fail to repay the stated amount of the bond upon maturity. Their term bonds remain “unsecured,” in which case investors must rely upon the company’s credibility and history. Secured term bonds are those that are backed by the assets or collateral of a company in case of a failure to repay the amount of the bond upon maturity.

In a sinking fund, the issuer makes periodic payment to the bond issue’s trustee, and the trustee purchases bonds in the open market and retires the bonds. The trustee represents the interests of the bondholders and what is a business debt schedule plus free template must use the sinking fund payments to buy bonds and retire them. Instead of retiring bonds according to a specific schedule, the trustee purchases bond from any bondholder who is willing to sell his holdings.

Which of these is most important for your financial advisor to have?

Term bonds mature on a single date, while serial bonds mature in installments. Serial bonds are often used to finance large projects or infrastructure developments, where the issuer repays a portion of the principal at regular intervals. This structure allows issuers to spread out their repayment obligations over time, providing more flexibility in managing cash flows. A term bond, also known as a bullet bond, is a type of bond where the entire principal amount is due at maturity. These bonds typically have a longer-term maturity, often ranging from 10 to 30 years.

Part 2: Your Current Nest Egg

Some term bonds carry a stipulation for repayment before the maturity date. Serial bonds can diversify retirement portfolios to keep a steady stream of income coming in at staggered intervals. Investopedia also defines the details of a serial bond in another segment. Guest Author James Chen explains that the structure of the serial bonds mature at regular intervals until all of the purchased bonds have matured.

What is your risk tolerance?

It also must pay coupon payments that decline each year, as the company retires more principal. However, it owes an additional $100,000 balloon payment in the final year. The financial accounting phrases term and serial bonds refer to indentures or contracts entered into by companies that represent a promise to pay.

This repayment structure can be attractive if a new business needs a loan but does not currently earn enough profit to make full payment on that loan each month. However, the company may be confident in 10 or 15 years, when the loan term ends, it will have grown exponentially and been able to meet the balloon payment. Serial bonds are bonds issued with different maturities and typically will have different interest rates. Term bonds are bonds issued with the same maturity date and interest rate. The nature of the issuer will affect the security (certainty of receiving the contracted payments) offered by the bond, and sometimes the tax treatment. Term bonds sometimes carry a call feature that allows the issuer to redeem the bonds prior to their maturity date.