Series Bonds are a category of debt securities in which the issuer releases bonds at various times but they all fall under the same indenture. An indenture is a formal and binding agreement that spells out the characteristics of the bond issue such as interest rate, maturity date, and other terms and conditions.
Types of Series Bonds§
Serial Bonds§
These are typically issued simultaneously but have different maturities. For example, a company might issue a $10 million bond with tranches maturing every year for the next ten years.
Term Bonds§
These bonds, in contrast, all mature at the same time, even if they are issued at different times.
Released Serially§
These series are issued in smaller chunks over a period — for instance, issuing smaller amounts each month for a year, but each with a different maturity date.
Key Features of Series Bonds§
Maturities§
Series Bonds have staggered maturity dates. This diversifies the risk associated with bond timing.
Indenture§
Controlled by a singular legal document which governs the terms like interest rates and repayment schedules.
Interest Rates§
The interest rates for Series Bonds can vary based on market conditions at the time of each issuance.
Historical Context§
Series Bonds have been employed by municipalities and corporations as far back as the 19th century. They offer flexibility in capital raising, allowing the issuer to tap into the market over time rather than in one lump sum issuance.
Applicability§
Municipalities§
Often used for funding various phases of large projects.
Corporations§
Useful in managing debt service over time, aligning it more closely with revenue streams.
Investors§
Attractive for diversification, as they provide opportunities to invest in bonds with varying maturities.
Examples§
Municipal Bonds§
A city might issue series bonds to finance the construction of a new infrastructure project. Rather than issuing a single tranche of $50 million, they could issue $5 million each year over ten years.
Corporate Bonds§
A corporation planning an extensive R&D project might use series bonds to align with its expected cash flows.
Comparisons§
Versus Traditional Bonds§
Traditional bonds typically have a single issue date and single maturity date. Series Bonds spread out these timings which can reduce interest rate risks.
Versus Sinking Fund Bonds§
Both involve repayment methods but sink fund bonds specifically involve setting aside money periodically for repaying the bond before its maturity while series bonds are staggered with different maturities.
Related Terms§
- Indenture: A formal agreement between the bond issuer and bondholders, governing the terms of the bond issues.
- Coupon Rate: The interest rate stated on a bond when it’s issued, which is paid semi-annually.
- Maturity Date: The date on which the principal amount of a bond becomes due and is repaid to the investor.
FAQs§
What are the benefits of Series Bonds?
Are Series Bonds riskier than traditional bonds?
Do Series Bonds have a fixed interest rate?
References§
- Fabozzi, Frank J. “The Handbook of Fixed Income Securities.” 8th Edition. McGraw-Hill Education, 2012.
- Kidwell, David S., et al. “Financial Institutions, Markets, and Money.” 11th Edition. Wiley, 2016.
- Securities Industry and Financial Markets Association (SIFMA) website.
Summary§
Series Bonds are an efficient financial instrument for issuers and investors, offering flexibility through staggered issuance and varying maturities. They provide the advantageous ability to manage risk and cash flows effectively, making them a valuable tool in the fixed-income market landscape.
