Term Bond

What is a 'Term Bond'

A term bond refers to bonds from the same issue that share the same maturity dates. Term bonds that have a call feature can be redeemed at an earlier date than the other issued bonds. A call feature, or call provision, is an agreement that bond issuers make with buyers.

BREAKING DOWN 'Term Bond'

This agreement in a call feature is called an "indenture," which is the schedule and the price of redemptions, plus the maturity dates. Some corporate and municipal bonds are examples of term bonds that have 10-year call features. This means the issuer of the bond can redeem it at a predetermined price, at specific times before the bond matures.

A term bond is the opposite of a serial bond, which has various maturity schedules at regular intervals until the issue is retired. A term bond refers to issuance of bonds that are repaid at the same time. Term bonds can be short-term or longer-term, with some having longer maturity than others. Term bonds are exempt from tax. They are relatively risk-free and return low interest.

Example

An example of a term bond is if a company issues a million dollars worth of bonds in Jan. 2016, all of which are set to mature on the same date two years hence. The investor can expect to receive repayment from these term bonds in Jan. 2018. Serial bonds, on the other hand, have different maturity rates and collect different interest rates. So, for instance, a company may issue a $1 million bond issue and allocate its repayment of $250,000 over five years. Corporations tend to issue term bonds in which all of these debts mature simultaneously. Municipalities, on the other hand, prefer to combine serial and term issuances so that some debts mature in one block, while payment of others are siphoned off.

Secured and Unsecured Term Bonds

Term bonds usually come with a sinking fund requirement, with the company setting aside an annual fund to repay the bond. Some companies also offer "secured term bonds" in which they promise to back their bond with company collateral, or assets, in case they fail to repay the stated amount of the bond upon maturity. Other companies offer no such support. Their term bonds remain "unsecured." Investors must rely upon the company's credibility and history.

Registered and Non-Registered Bonds

With registered term bonds, the issuer records details of the sale so that if the account is lost, the issuer can track the owner. Non-registered bonds are untraceable in that the company does not register the person to whom it sells its bonds.

Term bonds are also called "bullet-maturity bonds" or simply "bullet bonds," likely because they are "shot" simultaneously. Their bonds are non-callable. Bullet bonds pay a relatively low interest. Investors can choose whether to buy shorter or longer-term bullet bonds, with some maturing, for example, two years from the purchase date, while longer-term bonds mature in eight or 10 years from purchase. Portfolios that contain term, or bullet, bonds are called "bullet portfolios."

RELATED TERMS
  1. Term To Maturity

    The remaining life of a financial instrument. In bonds, it is ...
  2. Serial Bond

    A bond issue in which a portion of the outstanding bonds matures ...
  3. Bond

    A debt investment in which an investor loans money to an entity ...
  4. Serial Bond With Balloon

    A combination of a serial bond issue and a term bond issue. Essentially, ...
  5. Extendable Bond

    A long-term debt security that includes an option to lengthen ...
  6. Reverse Convertible Bond - RCB

    A bond that can be converted to cash, debt or equity at the discretion ...
Related Articles
  1. Managing Wealth

    How To Evaluate Bond Performance

    Learn about how investors should evaluate bond performance. See how the maturity of a bond can impact its exposure to interest rate risk.
  2. Markets

    Corporate Bond Basics: Learn to Invest

    Understand the basics of corporate bonds to increase your chances of positive returns.
  3. Personal Finance

    How To Choose The Right Bond For You

    Bond investing is a stable and low-risk way to diversify a portfolio. However, knowing which types of bonds are right for you is not always easy.
  4. Managing Wealth

    Bond Call Features: Don't Get Caught Off Guard

    Learn why early redemption occurs and how to avoid potential losses.
  5. 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 ...
  6. Markets

    The Basics Of Municipal Bonds

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

    5 Basic Things To Know About Bonds

    Learn these basic terms to breakdown this seemingly complex investment area.
  8. Managing Wealth

    The Basics Of Bonds

    Bonds play an important part in your portfolio as you age; learning about them makes good financial sense.
  9. Trading

    Top 6 Uses For Bonds

    We break down the stodgy stereotype to see what these investments can do for you.
  10. ETFs & Mutual Funds

    Key Strategies To Avoid Negative Bond Returns

    It is difficult to make money in bonds in a rising rate environment, but there are ways to avoid losses.
RELATED FAQS
  1. What happens to the price of a premium bond as it approaches maturity?

    Learn how bonds trade in regard to premiums and discounts, and how bond prices shift closer to par value as bonds approach ... Read Answer >>
  2. Why is my bond worth less than face value?

    Find out how bonds can be issued or traded for less than their listed face values, and learn what causes bond prices to fluctuate ... Read Answer >>
  3. 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 >>
  4. What risk factors should investors consider before purchasing a callable bond?

    Understand the difference between callable and non-callable bonds and consider all the various risk factors associated with ... Read Answer >>
  5. What forms of debt security are available for the average investor?

    Discover the various different types of debt securities, issued by government entities or corporations, that are available ... Read Answer >>
  6. How does face value differ from the price of a bond?

    Discover how bonds are traded as investment securities and understand the various terms used in bond trading, including par ... Read Answer >>
Hot Definitions
  1. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  2. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  3. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  4. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  5. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
  6. Weighted Average Life - WAL

    The average number of years for which each dollar of unpaid principal on a loan or mortgage remains outstanding. Once calculated, ...
Trading Center