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
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.
What are bonds and how do they work? ›
Bonds are generally issued with fixed par values and stated coupon rates. The coupon rate determines the annual interest payments to be paid to the bondholder and are based off of the bond's par value. Interest payments are usually paid every six months.
What do you mean by bond What are the different types of bond? ›
Some Points To Remember About Bonds
The repayment done through a Traditional Bond is also known as Bullet Repayment. Bonds with a maturity period of 7 to 10 years are called “Notes”. The Bonds can be categorised into four variants: Corporate Bonds, Municipal Bonds, Government Bonds and Agency Bonds.
What is a bond quizlet? ›
A bond is a fixed income instrument that represents a loan made by an investor to a borrower (typically corporate or governmental)
What is the basic term of a bond? ›
A bond is simply a loan taken out by a company. Instead of going to a bank, the company gets the money from investors who buy its bonds. In exchange for the capital, the company pays an interest coupon, which is the annual interest rate paid on a bond expressed as a percentage of the face value.
Can you withdraw money from a fixed term bond? ›
Normally, you can't withdraw money or close your Fixed Rate Savings Bond during its term.
How do bonds work step by step? ›
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.
Do bonds pay forever? ›
Perpetual bonds, also known as perps or consol bonds, are bonds with no maturity date. Although perpetual bonds are not redeemable, they pay a steady stream of interest in forever. Because of the nature of these bonds, they are often viewed as a type of equity and not a debt.
How do bond funds make you money? ›
Unlike individual bonds, which usually make semiannual interest payments, bond funds usually make monthly distributions that can be paid directly to the investor or reinvested into the fund to compound returns.
Can I lose any money by investing in bonds? ›
You can lose money on a bond if you sell it for less than you paid or the issuer defaults on their payments. When you buy or sell a bond, the commission is built into its price. The investment firm marks up the price of the bond slightly to cover the costs of selling the bond.
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 invest in bonds for beginners? ›
One of the simplest ways to invest in bonds is by purchasing a mutual fund or ETF that specializes in bonds. Government bonds can be purchased directly through government-sponsored websites without the need for a broker, though they can also be found as part of mutual funds or ETFs.
What is a term bond? ›
A term bond refers to bonds from the same issue that share the same maturity dates. In effect, term bonds mature on a specific date in the future and the bond face value must be repaid to the bondholder on that date.
How do you explain what a bond is? ›
Bonds are investment securities where an investor lends money to a company or a government for a set period of time, in exchange for regular interest payments. Once the bond reaches maturity, the bond issuer returns the investor's money.
What does bond tell us? ›
Two features of a bond—credit quality and time to maturity—are the principal determinants of a bond's coupon rate. If the issuer has a poor credit rating, the risk of default is greater, and these bonds pay more interest. Bonds that have a very long maturity date also usually pay a higher interest rate.
What happens at the end of a bond term? ›
A bond's term to maturity is the period during which its owner will receive interest payments on the investment. When the bond reaches maturity, the owner is repaid its par, or face, value.
Does a 10 year bond pay interest every year? ›
Bonds and Notes
Bonds are long-term securities that mature in 20 or 30 years. Notes are relatively short or medium-term securities that mature in 2, 3, 5, 7, or 10 years. Both bonds and notes pay interest every six months. The interest rate for a particular security is set at the auction.
How does a 30-year bond pay out? ›
Treasury bonds are government securities that have a 20-year or 30-year term, and they pay a fixed interest rate on a semi-annual basis. They earn interest until maturity and the owner is also paid a par amount, or the principal, when the Treasury bond matures.
Are fixed term bonds worth it? ›
You could earn a competitive interest rate on your spare cash by depositing it in a fixed rate bond, as they typically offer a higher interest rate than an easy access savings account. But since many fixed rate bonds do not allow withdrawals, this way of saving comes with some risk.
