Definition
A term bond is a type of bond where the entire principal amount is due to be repaid on a single, specified maturity date. This is in contrast to a serial bond, which has portions of the principal maturing at different intervals over the life of the bond. Term bonds often come with a call feature, allowing the issuer to redeem them before the maturity date under specific conditions.
Examples
- Municipal Bonds: Many municipal bonds are issued as term bonds, with the full repayment of principal scheduled for a single future date. This is common in infrastructure projects.
- Corporate Bonds: Corporations often issue term bonds to raise significant capital in one go, with the understanding that the principal will be repaid on a specified future date.
Frequently Asked Questions
What is a call feature in a term bond?
A call feature allows the issuer to redeem the bond before its maturity date. This can be advantageous for the issuer if interest rates decline, enabling refinancing at lower rates.
How does a term bond differ from a serial bond?
Unlike term bonds, which have a single maturity date, serial bonds have multiple maturity dates, with portions of the principal amount being repaid at different times.
Why might an investor choose term bonds over other types of bonds?
Investors might choose term bonds for their predictability and potential for higher returns, especially if interest rates are expected to drop or remain low.
Can a term bond be both callable and non-callable?
Yes, term bonds can be issued with or without a call feature. If non-callable, the issuer must pay the stated interest until maturity without the option to redeem early.
What is the risk associated with term bonds?
The main risk is the interest rate risk, where the value of the bond can fluctuate with changes in interest rates. Additionally, if the issuer defaults, the entire principal amount due at maturity could be at risk.
Related Terms
- Call Feature: A provision that allows the issuer to redeem a bond before its maturity date.
- Serial Bond: A bond issuance where portions of the total principal mature at different intervals.
- Fixed Income: Investments that pay returns on a fixed schedule, including bonds and debentures.
- Maturity Date: The date on which the principal amount of a bond is due to be repaid.
- Yield: The earnings generated on an investment over a particular period, expressed as a percentage.
Online References
Suggested Books for Further Studies
- Investing in Bonds For Dummies by Russell Wild
- The Bond Book by Annette Thau
- Bond Markets, Analysis, and Strategies by Frank J. Fabozzi
Fundamentals of Term Bonds: Finance Basics Quiz
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