Term versus Serial Bonds

Term Bonds Definition

Term bonds are bonds whose entire principal amount is due at a single date. Most corporate bonds are term bonds.

Serial Bonds Definition

Serial bonds have principal payments that are required at specific intervals. Serial bonds are often issued by state or local municipalities.

Example

To illustrate, assume that the city of San Francisco issues $5 million of serial bonds whose terms require that $500,000 of the bonds are to be repaid every 5 years, beginning 5 years after the date of issue. Thus, for the first 5 years, $5 million of bonds will be outstanding, and for the second 5 years, $4.5 million will be outstanding, and so forth. From both the investors’ and the issuer’s point of view, serial bonds help ensure that the issuer will be able to repay the entire principal.

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