Business

Finance
Term Bonds
What is a Bond in Accounting?

A bond is a fixed obligation to pay that is issued by a

corporation or government entity to investors. Bonds
are used to raise cash for operational or infrastructure
projects. Bonds usually include a periodic coupon
payment, and are paid off as of a specific maturity date.
 What is Term Bond?
A term bond refers to bonds from the same issue that
share the same maturity dates. Term bonds that have a
call feature can be redeemed at an earlier date than the
other issued bonds. A call feature, or call provision, is
an agreement that bond issuers make with buyers.
BREAKING DOWN 'Term Bond'

This agreement in a call feature is called an "indenture,"

which is the schedule and the price of redemptions,
plus the maturity dates. Some corporate and municipal
bonds are examples of term bonds that have 10-year
call features. This means the issuer of the bond can
redeem it at a predetermined price, at specific times
before the bond matures.
 A term bond is the opposite of serial bond, which has
various maturity schedules at regular intervals until the
issue is retired. A term bond refers to issuance of bonds
that are repaid at the same time. Term bonds can be
short-term or longer-term, with some having longer
maturity than others. Term bonds are exempt from tax.
They are relatively risk-free and return low interest.
 EXAMPLE (Term Bond)
An example of a term bond is if a company issues a million
dollars worth of bonds in Jan. 2016, all of which are set to
mature on the same date two years hence. The investor can
expect to receive repayment from these term bonds in Jan.
2018. Serial bonds, on the other hand, have different maturity
rates and collect 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 payment of others are siphoned off.
Secured and Unsecured Term Bonds

Term bonds usually come with a sinking fund

requirement, with the company setting 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." Investors must rely
upon the company's credibility and history.
SERIAL BOND
Serial bonds or installment bonds

Describes a bond issue that matures in portions over

several different dates. Instead of facing a large lump-
sum principal re-payment at maturity, an issuer can opt
to spread the principal repayment over several periods.
 HOW IT WORKS
Normally, when a company or government body issues
bonds, all of those bonds mature on the same date (that
is, the borrower must repay all of the debt on one
particular day). A serial bond issue, however, matures
over several periods (usually at regular intervals).
 EXAMPLE (Serial Bond)

The issuer of 100 million in traditional bonds

with ten years maturities will have to make a 100
million principal payment at the end of the tent year.
But the issuer of 100 million in serial bonds might
structure the offering such that 20 million matures after
five years, another 20 million matures the year after, 20
million the year after that and so on.
Difference Between Term Bonds & Serial Bonds

Term Bonds Serial Bonds

A term bond is a A serial bond is a
series of bonds that
are issued by the same
borrower and mature
on the same date.
bond (particularly a
municipal bond) in
which a certain
proportion
(installment) matures
at regular intervals
(e.g. each year) until
the entire issue is
retired.
Why long term bonds are riskier than short
term bonds?

A longer-term bond carries greater risk that higher

inflation could reduce the value of payments, as well as
greater risk that higher overall interest rates could cause
the bond's price to fall. Bonds with maturities of one to
10 years are sufficient for most long-term investors.
END