Serial Bonds

Serial bonds are distinct from term bonds, which have a single maturity date for the entire principal amount. The serial structure offers a staggered repayment schedule, providing both advantages and disadvantages for issuers and investors alike.

The key feature of serial bonds is their series of maturity dates. Each maturity date represents a portion of the total principal that will be repaid at that time. This contrasts with term bonds where the entire principal is due at a single maturity date.

Municipalities frequently issue serial bonds to finance long-term projects such as infrastructure development. The staggered repayment schedule aligns with the gradual generation of revenue from the project, making it easier to manage debt repayment.

From an issuer's perspective, serial bonds can reduce the risk of having to refinance a large principal amount at a potentially unfavorable interest rate environment. The gradual repayment also reduces the overall interest expense compared to a term bond with the same total principal and maturity.

Investors in serial bonds can choose maturities that match their investment horizon and risk tolerance. Shorter-term serial bonds generally have lower yields but also lower interest rate risk, while longer-term bonds offer higher yields but are more sensitive to interest rate fluctuations.

The pricing of serial bonds is more complex than term bonds due to the multiple maturity dates. Each maturity within the serial bond issue can be considered a separate bond with its own yield to maturity.

The history of serial bonds dates back to the early 20th century, with their popularity growing alongside the expansion of municipal infrastructure projects. They became a common tool for financing public works and other long-term investments.

While less common in the corporate world, serial bonds can be used by companies for specific projects or asset acquisitions where the asset generates revenue over time. This allows for a more closely aligned repayment schedule with the asset's cash flows.