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What is a Term Bond?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 14 November 2016
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    2003-2016
    Conjecture Corporation
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Term bonds are new bonds that are issued by a municipality and carry a single maturity date. The term bond may be issued as a stand-alone bond or include several term bonds issued under the umbrella of a serial bond issue. In all instances, the bond or bonds that are part of the term bond issue will carry the same maturity.

The use of a term bond approach is very common. Along with frequent use as the platform for municipal bonds, the term bond is also utilized with many corporate bond issues. Part of the attraction is that the single date of maturity makes the management of the bond clean and simple. When the maturity date is reached, the bondholder is paid the amount owed by the issuer of the bond, and the deal is considered complete.

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For the investor, a term bond situation can also be attractive. Because of the structure of the payment of the principle and dividends at the point of maturity, there are no taxes to pay during the life of the bond. Instead, the bondholder will pay taxes on the earned dividends at the time the bond reaches maturity. While this may mean a hefty tax obligation when the term bond does reach the maturation date, the savvy investor will take steps to use all legal means to minimize the taxes due on other holdings and investments. This action will help to partially absorb the impact of the single payment on the term bond.

Like most types of bonds, a term bond can be called or converted at points before maturity is reached. When this happens, the terms and conditions inherent in the bond issue will determine the amount of profit that the investor will make on the called term bond. Thus, it is a good idea for the investor to read all the terms and understand what type of dividends will be paid in the event that the term bond is called prior to the date of maturity. By understanding both the amount of return if the bond remains in effect until maturity and the profit that will result if the bond is called early, it is easier to decide if the bond issue is a good investment.

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