When it comes to municipal bonds (or “munis”), understanding their structure is essential for issuers, financial advisors, and investors alike. Two of the most common structures are serial bonds and term bonds, each offering distinct features and advantages.
What are Serial Bonds?
Serial bonds are structured so that portions of the principal are repaid in regular intervals over the life of the bond. This creates a more stable bond maturity schedule, with principal payments made to investors across multiple dates, typically annually or semiannually. The range of maturities in a serial bond issue helps issuers appeal to a broader group of investors with varying risk and return preferences.
What are Term Bonds?
In contrast to serial bonds, term bonds are structured to mature on a single future date, meaning the entire principal is repaid at once. These often include sinking funds where some portion of the principal due is repaid early and set aside before the maturity date. These bonds typically offer higher interest rates due to their longer maturities and the associated long-term risk.
Serial Vs. Term Bonds: Key Differences
- Serial Bonds: Succession of annual principal payments, appeal to wider investor base due to more flexibility in risk and return.
- Term Bonds: Repay principal all at once, may feature sinking funds, appeal to institutional investors focused on meeting long-term investment goals.
Summary
Whether structuring a new municipal bond issue or evaluating an investment opportunity, it’s important to understand the fundamental differences between serial and term bonds. Each serves a specific role in the municipal finance ecosystem, offering unique benefits to both issuers and investors. In many cases, a municipal bond offering may include a combination of both structures to optimize cash flow, appeal to a wider investor base, and balance borrowing costs. If you are interested in exploring bond structure for your institution, reach out to one of our experienced municipal advisors: https://blueroseadvisors.com/contact-us/
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Blue Rose Capital Advisors is an independent financial advisory firm that serves the higher education, healthcare, non-profit, government, and corporate sectors. Blue Rose provides debt, derivatives, reinvestment, strategic and financial consulting services, and other specialized services to help clients achieve their goals. Blue Rose is registered as a Municipal Advisor with the Securities and Exchange Commission (SEC) and Municipal Securities Rulemaking Board (MSRB).
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