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."

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