What is a Term Bond
A term bond refers to bonds from the same issue that share the same maturity dates. In effect, term bonds mature on a specific date in the future and the bond face value must be repaid to the bondholder on that date. The term of the bond is amount of time between bond issuance and bond maturity.
BREAKING DOWN Term Bond
Term bonds are also called "bullet-maturity bonds" or simply "bullet bonds," likely because they are "shot" simultaneously. 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."
Callable Term Bonds
Term bonds that have a call feature can be redeemed at an earlier stipulated date prior to the maturity date. A call feature, or call provision, is an agreement that bond issuers make with investors. This agreement is written in a document referred to as an indenture, which explains how and when the bond can be called, including the multiple call dates throughout the bond's life. Thus, the issuer of a callable bond can redeem the bond at a predetermined price, at specific times before the bond matures. The time from issuance to call date(s) represents the bond's active term. Some corporate and municipal bonds are examples of term bonds that have 10-year call features.
Term Bonds vs. Serial Bonds
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. Furthermore, they are exempt from tax and are relatively risk-free with a low interest return.
An example, let's assume 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 dates and offer 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," in which case 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.