Serial bonds

Serial bonds

Serial bonds are referred to as bonds where a portion of the bond will be restructured into small amounts that are paid off at regular intervals. This causes the total amount of the bond to decrease gradually, and the buyer gets a regular stream of income coming in. 

What is a Serial Bond? 

A serial bond is often described as a security bond that will repay at regular intervals until the maturity date arrives, and by then, the entire amount will be paid off. Unlike term bonds where the entire principal amount is paid off as a one-time payment at the time of maturity, serial bands provide the opportunity to pay off smaller chunks of the amount as instalments that are paid once or twice a year. The exact amount and schedule of these instalments are specified in detail on the bond indenture. 

Understanding Serial Bonds 

As serial bonds provide regular payoffs instead of a one-time payment at the time of maturity, they can be an attractive option for some investors. Serial bonds were created with the goal of providing a steady cash flow that many capital projects desire. Since the principal amount is divided into smaller chunks and paid off regularly, the amount of money that the issuer needs to pay in the end is reduced dramatically. This ensures that the issuer has no risk of missing any payments.  

These bonds are issued by the central government, municipality or even public or private projects. Projects of large scale often require a lot of cash flow during the initial stages of the project, but once the project is live, they begin generating profits that can be used to pay off the debt in small but regular intervals. This would drastically reduce the burden on them. 

Advantages of Serial Bonds 

In serial bonds, the principal amount is divided into smaller chunks that are paid off regularly, which reduces the principal amount gradually. So, one key advantage of serial bonds is lower interest. Also, since the interest rates are calculated with respect to the principal amount, the interest amount will decrease as the principal amount decreases after every payoff. On top of that, since the repayment liability decreases at regular intervals, the risk of defaulting on the payment is lower. 

It also allows you to diversify your investment portfolio. Serial bonds are often called security bonds as they can help cover your finances in case some of your other investments fail. Not to mention, serial bonds can be quite lucrative for investors who are looking to diversify their investment portfolio. The interest rates also play a role in attracting more investors. Serial bonds with shorter maturity tend to have much lower interest rates and are attractive to investors.

Disadvantages of Serial Bonds 

If you are buying serial bonds for a project, then you have to be sure it can generate enough profits to pay off the debts. Also, serial bonds may not be appropriate for every project. So, if you are unsure if the project will be able to generate enough profits, or if there’s a delay or certain uncertainty, buying serial bonds is not recommended. 

Example of Serial Bonds 

Suppose a bond issuer provided a generous bond of US$5 million in 2020 at a 10% interest rate, which was not uncommon. And this 10% interest rate was annually payable for 5 years from 2023. 

So, for the first 3 years, you would not need to pay anything. You would only start paying in 2023 and for that year, you would only need to pay the interest amount, which was US$500,000. For next year, it would be a small portion of the principal amount and the interest amount, which was US$1.5 million and a balance of US$4 million would remain. For 2025, you would need to pay US$1.4 million and a balance of US$3 million would remain. For 2026, you would need to pay US$ 1.3 million and a balance of US$2 million will remain. For 2027, you would need to pay US$1.2 million and a balance of US$  million will remain. For 2025, you would need to pay US$ 1.1 million and your debt would be paid entirely. 

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