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Medium term notes are bonds and other types of debt notes that have a maturity period somewhere between five and ten years. Sometimes referred to simply as an MTN, this type of financial note may include a term that is very different from the period of maturation, ranging anywhere from a single year to fifty years. A medium term note may be structured as a fixed-income security or as some type of floating coupon, and is usually made available for purchase through a dealer.
There are other variations that may apply to a specific medium term note. It is possible to structure the debt note so that it is noncallable, which means the maturity date is fixed. The note can also be structured to include call or put options that would make it possible to redeem the bond earlier than the projected maturity date. Because of the variety of ways that the note can be structured, investors should look closely at how a bond issue is put together, and determine if the return, even if the bond is called early, would be worth the investment.
A medium term note does offer some advantages over other types of bonds or notes. One has to do with the coupon rate that applies. While there are exceptions, the coupon rate on a medium term note is likely to be higher than the rate available with any short-term note. Assuming that the investor can afford to hold the note until it reaches maturity, the return on the investment should be a little higher.
For the issuing entity, a medium term note is often an ideal method for generating cash flow from the debt issuance. The funds generated can be used to fund special projects and to meet any periodic payments of interest due to the investors of the bond issue. This allows the business to continue using its other streams of income to handle the usual business expenses while still pursuing the project. As the project develops and begins to generate revenue on its own, the company is able to use that revenue to fulfill all its commitments to investors in the note, all without utilizing any of the other assets of the business, and without taking out any type of loan. This model for funding can often be accomplished at a cost that is substantially lower than other common funding options, making it worthy of consideration by small businesses as well as large corporations.
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