What Is a Term Bond?
Term bonds are notes issued by companies to the public or investors with scheduled maturity dates. The term of the bond is the amount of time between bond issuance and bond maturity. On the maturity date of a term bond, the bond's face value, the principal amount, must be repaid to the bondholder.
Term bonds can be contrasted with serial bonds, which mature in installments over a period of time.
Key Takeaways
- Term bonds are bonds from a single issue that all mature on the same date.
- On the maturity date of term bonds, the face value (principal) must be repaid to the bondholders.
- Call provisions within term bonds stipulate characteristics where issuers can redeem bonds from investors before the maturity date.
- Unlike term bonds, serial bonds can have multiple and varying maturity dates.
How a Term Bond Works
Term bonds can have short- or long-term maturities; some may mature in a matter of weeks or months while others mature several years from the issue date.
Term bonds that have a call feature can be redeemed at an earlier stipulated date before the maturity date.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. Some corporate and municipal bonds are examples of term bonds that have 10-year call features.
Types of Term Bonds
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. Other companies offer no such support. Their term bonds remain "unsecured," in which case investors must rely upon the company's credibility and history.
With registered term bonds, the issuer records details of the sale so that if the account is lost, the issuer can track the owner. Non-registered bonds are untraceable in that the company does not register the individuals to whom it sells its bonds.
Term bonds can be backed by specific collateral (secured term bonds), where the collateral is set aside to secure the bonds if they cannot be repaid at maturity.
Term Bonds vs. Serial Bonds
A term bond can be contrasted with a serial bond, which has various maturity schedules set at regular intervals until the issue is retired. A term bond refers to the issuance of bonds that are repaid at the same time. Term bonds can be short-term or long-term, with the latter having longer maturity dates than the former.
A serial bond structure is a common strategy for municipalrevenue bondsbecause these bonds are issued for fee-generating projects built by states and cities. Assume, for example, that a city builds a sports stadium that is funded with parking fees, stadiumconcessionincome, and lease income. If the bond issuer believes that the facility can generate income consistently each year, it can structure the bond for serial maturity dates. As the total amount of bonds outstanding decreases, the future risk of the bond issue defaulting also declines.
Example of a Term Bond
As an example, let's assume a company issues a million dollars worth of bonds in January 2020, all of which are set to mature on the same date two years later. The investor can expect to receive repayment from these term bonds in January 2022.
Serial bonds, on the other hand, have different maturity dates and offer different interest rates. So, for instance, a company may issue a $1 million bond issue and allocate its repayment of $250,000 over five years.
Corporations tend to issue term bonds in which all of these debts mature simultaneously. Municipalities, on the other hand, prefer to combine serial and term issuances so that some debts mature in one block, while the payment of others is siphoned off.
FAQs
Term bonds are notes issued by companies to the public or investors with scheduled maturity dates. The term of the bond is the amount of time between bond issuance and bond maturity. On the maturity date of a term bond, the bond's face value, the principal amount, must be repaid to the bondholder.
What are the different types of bonds and what do they do? ›
There are five main types of bonds: Treasury, savings, agency, municipal, and corporate. Each type of bond has its own sellers, purposes, buyers, and levels of risk vs. return. If you want to take advantage of bonds, you can also buy securities that are based on bonds, such as bond mutual funds.
What's the difference between a term bond and a serial bond? ›
Term bonds are bonds which mature or come due on a single date. Serial bonds are bonds which do not mature or come due on a single date. Instead, serial bonds have maturity dates which are staggered over several or many years. You could say that serial bonds come due over a series of dates.
What is a bond and how does it work? ›
Bonds are issued by governments and corporations when they want to raise money. By buying a bond, you're giving the issuer a loan, and they agree to pay you back the face value of the loan on a specific date, and to pay you periodic interest payments along the way, usually twice a year.
What is a bond and what are its three main components? ›
Key Points
The three basic components of a bond are its maturity, its face value, and its coupon yield. Bond prices fluctuate inversely to interest rates.
Can I lose any money by investing in bonds? ›
Key Takeaways. Bonds are often touted as less risky than stocks—and for the most part, they are—but that does not mean you cannot lose money owning bonds. Bond prices decline when interest rates rise, when the issuer experiences a negative credit event, or as market liquidity dries up.
How do bonds pay out? ›
Bonds pay a fixed rate of interest every six months until they mature. You can hold a bond until it matures or sell it before it matures. EE Bonds, I Bonds, and HH Bonds are U.S. savings bonds. For information, see U.S. Savings Bonds.
How does a term bond work? ›
A term bond refers to the issuance of bonds that are repaid at the same time. Term bonds can be short-term or long-term, with the latter having longer maturity dates than the former.
Do you lose money when a bond is called? ›
Even though the issuer might pay you a bonus when the bond is called, you could still end up losing money. Plus, you might not be able to reinvest the cash at a similar rate of return, which can disrupt your portfolio.
Are serial bonds risky? ›
However, serial bonds are less risky than straight bonds because the loan is amortized throughout the term. If the issuer goes bankrupt within the bond term and its assets are not sufficient to cover its debt obligations, you will only lose the part of the bond principal which has not yet been repaid.
The people who purchase a bond receive interest payments during the bond's term (or for as long as they hold the bond) at the bond's stated interest rate. When the bond matures (the term of the bond expires), the company pays back the bondholder the bond's face value.
What are the cons of bonds? ›
Cons
- Historically, bonds have provided lower long-term returns than stocks.
- Bond prices fall when interest rates go up. Long-term bonds, especially, suffer from price fluctuations as interest rates rise and fall.
U.S. Treasuries are considered among the safest available investments because of the very low risk of default. Unfortunately, this also means they have among the lowest yields, even if interest income from Treasuries is generally exempt from local and state income taxes.
Are bonds a good investment? ›
Historically, bonds are less volatile than stocks.
Bond prices will fluctuate, but overall these investments are more stable, compared to other investments. “Bonds can bring stability, in part because their market prices have been more stable than stocks over long time periods,” says Alvarado.
How to make money on bonds? ›
There are two ways to make money by investing in bonds. The first is to hold those bonds until their maturity date and collect interest payments on them. Bond interest is usually paid twice a year. The second way to profit from bonds is to sell them at a price that's higher than you initially paid.
What is a primary concern for investors when it comes to bonds? ›
one key risk to a bondholder is that the company may fail to make timely payments of interest or principal. If that happens, the company will default on its bonds. this “default risk” makes the creditworthiness of the company—that is, its ability to pay its debt obligations on time—an important concern to bondholders.
What are the 4 types of bonds that can form? ›
4 Major Types of Bonding in Chemistry and Their Properties
- Ionic bond.
- Covalent bond.
- Metallic bond.
- Hydrogen bond.
U.S. government and agency bonds and securities carry the "full faith and credit" guarantee of the U.S. government and are considered one of the safest investments. What that means: regardless of war, inflation or the state of the economy, the U.S. government pays back its bondholders.
Which bonds are risky? ›
High-yield or junk bonds typically carry the highest risk among all types of bonds. These bonds are issued by companies or entities with lower credit ratings or creditworthiness, making them more prone to default.
