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.
- 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
### What is a term bond?
- [ ] A bond that matures in different installments.
- [x] A bond that matures at a single, specified date.
- [ ] A bond issued by the government only.
- [ ] A bond with a variable interest rate.
> **Explanation:** A term bond is one where the entire principal amount matures on a single, specified date, rather than in installments.
### What is a primary characteristic of a term bond?
- [ ] Multiple maturity dates
- [x] Single maturity date
- [ ] Variable interest rates
- [ ] No interest payments
> **Explanation:** The primary characteristic of a term bond is that the entire principal is due to be repaid on one specified maturity date.
### What does a call feature allow the issuer to do?
- [x] Redeem a bond before its maturity date
- [ ] Extend the maturity date of a bond
- [ ] Only issue new bonds
- [ ] Increase the interest rate periodically
> **Explanation:** A call feature allows the issuer to redeem the bond before its maturity date, potentially reducing their interest rate expense if rates drop.
### Why might an issuer choose to call a bond?
- [ ] To increase future interest payments
- [ ] Due to financial trouble
- [x] To refinance at lower interest rates
- [ ] To change the bond terms
> **Explanation:** Issuers may choose to call a bond to refinance it at lower interest rates, saving on interest expenses.
### What counterpart to the term bond has multiple maturity dates?
- [ ] Variable bond
- [ ] Callable bond
- [ ] Zero-coupon bond
- [x] Serial bond
> **Explanation:** Serial bonds differ from term bonds by having multiple maturity dates, allowing portions of the principal to be repaid at various times.
### If interest rates increase, what typically happens to the market value of term bonds?
- [x] It decreases
- [ ] It increases
- [ ] It stays the same
- [ ] It doubles
> **Explanation:** When interest rates increase, the market value of term bonds typically decreases because newer issues may offer higher yields.
### What is the main risk associated with term bonds?
- [ ] Inflation risk
- [ ] Liquidity risk
- [x] Interest rate risk
- [ ] Market risk
> **Explanation:** The main risk associated with term bonds is interest rate risk, where changes in interest rates affect the value of the bonds.
### What happens at the maturity date of a term bond?
- [ ] The bondholder pays more interest
- [x] The principal is repaid
- [ ] The interest rate increases
- [ ] The bond is called
> **Explanation:** At the maturity date of a term bond, the principal amount is repaid to the bondholder.
### Which type of bond might have higher returns due to longer maturity and potential interest risks?
- [x] Term bond
- [ ] Serial bond
- [ ] Treasury bond
- [ ] Equity bond
> **Explanation:** Term bonds might offer higher returns due to their longer maturity and the interest rate risk associated with them.
### What feature might be included in a term bond to protect the issuer?
- [ ] Put feature
- [x] Call feature
- [ ] Conversion feature
- [ ] Equity feature
> **Explanation:** A call feature is included in a term bond to give the issuer the option to redeem the bond before maturity, protecting against interest rate declines.
Thank you for exploring the comprehensive domain of term bonds and testing your knowledge with our specialized quiz on finance basics. Keep enhancing your understanding of fixed income investments!
