Debt Securities - Maturities
When a bond matures, the principal payment and the last semi-annual interest payment are due. Corporations will select to issue bonds with the maturity type that best fits their needs, based on the interest rate environment and marketability.
A term bond is the most common type of corporate bond issue. With a term bond, the entire principal amount becomes due on a specific date. For example, if XYZ corporation issued $100,000,000 worth of 8% bonds due 6/1/2010 the entire $100,000,000 would be due to bondholders on June 1st 2010. On June 1st bondholders would also receive their last semi-annual interest payment and their principal payment.
A serial bond issue is one that has a portion of the issue maturing over a series of years. Traditionally serial bonds have larger portions of the principal maturing in later years. The Portion of the bonds maturing in later years will carry a higher yield to maturity because investors who have their money at risk longer will demand a higher interest rate.
A balloon issue contains a maturity schedule that repays a portion of the issue’s principal over a number of years, just like a serial issue. However, with a balloon maturity the largest portion of the principal amount is due on the last date.
With a series issue, corporations may elect to spread the issuance of the bonds over a period of several years. This will give the corporation the flexibility to borrow money to meet its goals as its needs change.Introduction