Term Bond

A Term Bond represents the notes or a group of bonds that all share the same maturity date with their principal payable on a single date. The technique helps a bond issuer take advantage of maximum time coverage and use all the cash received from the bond investors.

The term represents the period from when the bond was issued to its maturity date. The bond’s face value and interest are repaid to the investor on maturity. With fixed maturity dates, they have low risk and low interest rate returns. These are usually corporate bonds issued to raise capital and support projects.

• Term bonds represent bonds that share a scheduled maturity date, letting the issuer take full advantage of the capital accumulated by investors.
• There are three types of bonds: issued by local or state government, issued by municipalities, and company-issued bonds as part of employees’ savings plans.
• Many investors also know them as bullet bonds or bullet maturity bonds.
• It is rare, but there is a possibility that the issuer goes bankrupt and the bond investment becomes worthless; therefore, a risk factor is always present.

Term bonds represent notes and debt securities that demand the entire principal amount be paid on a single due date. Such bonds are different from regular ones because they require a lump sum amount of investment and a scheduled maturity date. Bonds are generally debt securities issued by governments or business corporations to raise capital for their operations, expansion, and projects. These bonds have a maturity period and come with a coupon rate, initially, the interest rate offered to the investors who decide to buy them. On the day of maturity, the principal is repaid to the investor.

Based on time, these bonds are classified into three types: short-term, intermediate-term bonds, and long-term. In other bonds, there is always an option of paying the interest amount in subdivided installments; therefore, these bonds are rigid and require a hefty capital compared to other bonds and debt securities.

From the issuer’s perspective, a payback of a large group of bonds scheduled simultaneously can bring liquidity problems. If the market interest rate has increased and the issuer decides to roll over the debt into a new bond issuance, the replacement debt cost will be higher than the original interest costs. However, one of the critical advantages that work for the bond issuer is that due to a single maturity date, the issuer has better access and a more comprehensive time with the money accumulated from the investments. On the other hand, investors may choose these bonds because it allows them to lock in their money for a good period.

Depending on the need, the bond purchaser can look for the best bonds available in the market and choose the time they want to invest. An investor or buyer will likely opt for government bonds as they offer guaranteed returns.

Let us consider the following examples to understand the concept even better:

Example #1

Miller has just received a large sum of money from his father. He is financially sound and decides to invest in a term bond issued by a corporation. He invests $90,000 through a single payment for 18 years.

As per the company’s issuance, the quarterly interest rate offered was 4.5%, which technically means that Miller shall receive the interest payment on his $90,000 in this bond investment every three months throughout the next 18 years till the bond matures.

Once matured, the company will repay the entire principal amount to Miller; it is a classic example of such a bond. However, there are different types of bonds, and if Miller is looking for higher returns, he may opt for a serial bond instead. Still, with high returns, certain limitations and a higher risk factor will be included. Or if Miller wants to enjoy early but guaranteed returns, he can invest in short-term bonds.

Example #2

Parthian Partners Limited, a Nigerian conglomerate brokerage firm, has issued its first short-term bond of 10 billion. It is a three-year fixed-rate bond under the Financial Markets Dealers Quotation (FMDQ) Securities Exchange framework. The bond issued at a coupon rate of 13.5% has attracted many institutional investors.

The success of the intermediate-term bond issuance works in favor of the company’s good funding profile, owners' support and capitalization, and asset quality. The company looks forward to using the net earnings to increase the Nigerian debt market liquidity. They are the first to issue such a big bond across the country.

The primary differences between the concepts are listed below:

This has been a guide to what is Term Bond. Here, we compare it with serial bond and explain the concept in detail with its examples. You may also have a look at the following articles -

• Bond Market Index
• Bond Retirement
• Bond Certificate