What is a 'Serial Bond'

A serial bond is a bond issue that is structured so that a portion of the outstanding bonds mature at regular intervals until all of the bonds have matured. Because the bonds mature gradually over a period of years, these bonds are used to finance projects that provide a consistent income stream for bond repayment. The entire bond issue is sold to the public on the same date, and the maturity dates are stated in the offering documents.

BREAKING DOWN 'Serial Bond'

If an issuer reduces the dollar amount of bonds outstanding, it reduces the risk that the issuer misses a principal repayment or interest payment and defaults on the bond issue. While a serial bond issue requires the issuer to repay specific bondholders on a stated date, other bond issues are structured with a sinking fund.

The Differences Between Sinking Funds and Serial Bond Issues

In a sinking fund, the issuer makes periodic payment to the bond issue's trustee, and the trustee purchases bonds in the open market and retires the bonds. The trustee represents the interests of the bondholders and must use the sinking fund payments to buy bonds and retire them. Instead of retiring bonds according to a specific schedule, the trustee purchases bond from any bondholder who is willing to sell his holdings. Both sinking funds and serial bond issues reduce the total dollar amount of bonds outstanding over time.

Factoring in Municipal Revenue Bonds

A serial bond structure is a common strategy for municipal revenue bonds, because these bonds are issued for fee-generating projects built by states and cities. Assume, for example, that a city builds a sports stadium that is funded with parking fees, stadium concession income and lease income. If the bond issuer believes that the facility can generate income consistently each year, it can structure the bond for serial maturity dates. As the total amount of bonds outstanding decreases, the future risk on the bond issue defaulting also declines.

Examples of Bond Rating Companies

Standard & Poor’s and Moody’s Investor Services both provide bond ratings that assess the ability of a bond issuer to repay principal and interest payments on time. A bond issue with a sinking fund or a serial maturity has more creditworthiness than a bond issue that matures entirely on one maturity date. If, for example, a serial bond for a $10 million stadium bond misses bond interest payments 15 years after the issue date, a certain dollar amount of bonds are already paid off before year 15. Because fewer bonds are outstanding, the issuer may be able to recover financially and pay the interest payments that were missed.

RELATED TERMS
  1. Term Bond

    Bonds from the same issue that share the same maturity dates. ...
  2. Sinking Fund

    A means of repaying funds that were borrowed through a bond issue. ...
  3. Extendable Bond

    A long-term debt security that includes an option to lengthen ...
  4. Bond Yield

    The amount of return an investor will realize on a bond. Several ...
  5. Discount Bond

    A bond that is issued for less than its par (or face) value, ...
  6. Term To Maturity

    The remaining life of a financial instrument. In bonds, it is ...
Related Articles
  1. Investing

    The Basics Of Municipal Bonds

    Investing in these bonds may offer a tax-free income stream but they are not without risks.
  2. Investing

    Investing in Bonds: 5 Mistakes to Avoid in Today's Market

    Investors need to understand the five mistakes involving interest rate risk, credit risk, complex bonds, markups and inflation to avoid in the bond market.
  3. Financial Advisor

    Advising FAs: Explaining Bonds to a Client

    Most of us have borrowed money at some point in our lives, and just as people need money, so do companies and governments. Companies need funds to expand into new markets, while governments need ...
  4. Investing

    Top 6 Uses For Bonds

    We break down the stodgy stereotype to see what these investments can do for you.
  5. Investing

    A Guide to High Yield Corporate Bonds

    The universe of corporate high yield bonds encompasses multiple different types and structures.
  6. Financial Advisor

    7 Questions to Consider Before Investing in Bonds

    There is a significant number of questions every investor, private or institutional, should consider before investing in bonds.
  7. Investing

    Surprise! The Best Long-term Bond Investment May Be Savings Bonds

    A 20-year Series EE savings bond pays more interest than a 20-year Treasury bond. So are government-issued long-term bonds the best bet going?
RELATED FAQS
  1. What determines the price of a bond in the open market?

    Learn more about some of the factors that influence the valuation of bonds on the open market, and why bond prices and yields ... Read Answer >>
  2. Which factors most influence fixed income securities?

    Learn about the main factors that impact the price of fixed income securities, and understand the various types of risk associated ... Read Answer >>
Hot Definitions
  1. Expense Ratio

    A measure of what it costs an investment company to operate a mutual fund. An expense ratio is determined through an annual ...
  2. Pro Forma

    A Latin term meaning "for the sake of form". In the investing world, it describes a method of calculating financial results ...
  3. Trumpcare

    The American Health Care Act, also known as Trumpcare and Ryancare, is the Republican proposal to replace Obamacare.
  4. Free Carrier - FCA

    A trade term requiring the seller to deliver goods to a named airport, terminal, or other place where the carrier operates. ...
  5. Portable Alpha

    A strategy in which portfolio managers separate alpha from beta by investing in securities that differ from the market index ...
  6. Run Rate

    1. How the financial performance of a company would look if you were to extrapolate current results out over a certain period ...
Trading Center