Issuers sometimes issue bonds that mature in installments over a specified period. These are called serial bonds and they represent one of the different types of bonds based on terms alongside short-term-to-long-term bonds and perpetual bonds. The main characteristic of a particular serial bond is that it is a multiple debt issue in which it is segmented or split into multiple smaller bonds and each matures at staggered intervals until all segments have matured.
These bonds are often issued by governments or companies that require long-term financing for a specific long-term project or the attainment of a long-term plan that would provide a consistent income stream throughout its duration. Issuing these bonds allow for a more predictable repayment schedule that matches the expected cash flow generated by the project or plan while also helping spread out the debt obligations of their respective issuers.
Nevertheless, when it comes to bond investing, purchasing and holding these bonds can provide a safer investment than short-term bonds and high-yield bonds. However, because the returns of these bonds are tied to the expected cash flows of specified projects or plans, they might not be ideal for certain investors who value reliable income streams. This article explores and describes the advantages and disadvantages of investing in serial bonds.
Pros: Advantages of Serial Bonds
The fact that these bonds mature in installments over a specific period means that they can be aligned with investment goals and objectives spread throughout multiple investment horizons. Serial bonds also offer some of the advantages of long-term bonds and even the benefits of investing in short-term bonds due to their segmented structured and staggered maturities. The following are the specific advantages of serial bonds:
• Multiple Maturity Dates: The main benefit of investing in a bond with multiple maturity dates is that it can be aligned with an overall investment purpose with different goals and objectives that follow multiple or different investment horizons. The stream of income from this bond is predetermined and predictable.
• Less Credit or Default Risk: Another advantage of serial bonds is that they are exposed to less credit risk than straight bonds because the principal is repaid in installments at regular intervals. This means reducing the impact of unforeseen future events that might lead to the unavailability of large sums on a single maturity date.
• Diversification of Portfolio: These bonds are issued by entities across different sectors and industries. Purchasing and holding different serial bonds from different issuers can have diversification benefits while also spreading out the risks associated with a particular portfolio of bonds or a fixed-income portfolio.
• Support Relatable Initiatives: Some serial bonds are issued in association with specific projects or plans that might align with the personal values and beliefs of the investors. Hence, in considering serialized specialized bonds such as green bonds or social bonds, investing would mean supporting the underlying causes.
• Other Potential Benefits: Long-term serial bonds may provide higher potential returns than other fixed-income securities. Furthermore, when it comes to short-term serial bonds, these bonds may provide some level of liquidity because they can be bought and sold or traded more readily than long-term bonds.
Cons: Disadvantages of Serial Bonds
Some of the risks in bond investing are heightened in serial bonds. These include greater exposure to interest rate and credit or default risks. Liquidation can be a problem during times of market stress. Furthermore, compared to short-term callable bonds and high-yield bonds, these bonds tend to provide lower yields. Bondholders are also exposed to reinvestment risk. The following are the specific disadvantages of serial bonds:
• Lower Potential Returns: Serial bonds tend to have higher coupon rates than straight bonds but it is still possible for them to have lower yields than other types of bonds with similar credit ratings and maturities. The yields are often tied to the capabilities of the associated projects or plans to generate a revenue stream.
• Tied To Funded Project or Plan: The level of credit or default risk of these bonds depends on the capabilities of the associated project or plan to generate regular cash flow or revenue. It is also possible for the market value or price of these bonds to decline if the associated project or plan is not performing as expected.
• Reinvestment Risk: Another disadvantage of serial bonds is that it exposes their bondholders to reinvestment risk. This risk arises when the interest rate environment is declining and the bondholders are unable to reinvest whatever they have received back from maturing segments of the bonds at an ideal coupon rate.
• Longer Investment Horizon: These bonds are not ideal for short-term investments and are more suitable for investors with long investment horizons. Investing in these securities also requires a high level of patience because the staggered maturity dates often result in a more extended period of full repayment.