| DEFINITION: A term bond is one that’s issued as a part of a group of bonds that are all scheduled to reach maturity on the same date and offer a single interest rate. |
In the case of bond issues…
When a municipality issues term bonds, it issues many individual bonds, each of which matures on the same date and offers the same interest rate. Terms can have maturity dates ranging from months to years. They also often have a call feature that allows them to be redeemed at a date earlier than their scheduled maturity date.
Many term bonds also have a sinking fund requirement, where the issuer must set aside money each year to help repay the bond. These sinking funds ensure the bond issuer will have the funds to repay investors when the bonds reach maturity. Term bonds can also be either secured or unsecured. Secured term bonds are backed by municipality assets, whereas unsecured bonds are not.
| EXAMPLE: Suppose your local municipality issues $1 million of term bonds with a 5% interest rate and a 10-year term. Over the next decade, the municipality will make interest payments to its bondholders. And when 10 years pass, the municipality will repay the full face value of all the bonds at once. Throughout those 10 years, in addition to making interest payments to the bondholders, the municipality may also have been depositing money into a sinking fund each year to help with the final bond repayment. |
What’s important here?
Term bonds are one of the simplest types of bonds, since they have a set maturity date and interest rate, and all bonds in the issue will mature at the same time.
Term bonds can be contrasted with serial bonds, which have set repayment schedules throughout their life. Serial bonds are often revenue bonds, meaning those whose repayment is funded by a particular project, and once the project starts generating income, that income is used to make the interval bond repayments.