What are Serial Bonds?

Financial bonds are often used to attract investors to projects where money is needed. The investors lend a specified amount in return for a promise to receive a higher amount in the future. Some financial bonds have one maturity date. This refers to the date on which the investor's initial loan and his profit will be repaid. Serial bonds, however, are differentiated by the fact that they have numerous maturity dates.

When a person buys a serial bond, she will not be repaid in a lump sum. She will receive several fractions of the amount that is due to her on different dates. The maturity dates of serial bonds can occur at regular intervals. If the first maturity date is five years from the day that the bond was obtained, then it is likely that the second will be ten years from the date of purchase. Although this is a common practice, it is not absolute.

Serial bonds can be issued by public or private entities. They are commonly used, however, to support municipal projects in cities. These bonds are often issued for projects that are scheduled to be completed in phases.

Take, for example, a land development project. One phase of the project may be completed and sales or leasing may begin. Several years later, another section may be completed and then sales and leasing in that area may begin. The repayment of the issued serial bonds may be scheduled in coordination with the completion of each section of the project, since funds that are generated may be sufficient to repay portions of the debt.

It may be helpful to think of serial bonds as many small bonds within a large bond. The periodic repayment of serial bonds is managed by coupons. As each coupon reaches its maturity date, it can be redeemed for a portion of the amount outstanding.

Serial bonds can be beneficial to the issuer when compared to other options. When interest is attached to debt, the debtor generally pays more interest on larger amounts. If the issuer of serial bonds, therefore, chose to wait and repay the full amount outstanding at once, it would likely be more costly. By making periodic payments, the issuer reduces the outstanding amount on which interest must be paid.

For example, consider that City Water Works will repay $500,000 US Dollars (USD) of a $2 million USD bond this year. After that payment, interest will only apply to $1.5 million USD. Next year, after another $500,000 USD payment is made, interest will only apply to $1 million USD. This should translate into significant savings for the company.