Question

In: Finance

Describe a serial bond issue. Why are serial bond issues preferred by the issuer? Why are...

  1. Describe a serial bond issue.
  2. Why are serial bond issues preferred by the issuer?
  3. Why are serial bond issues preferred by the bond holders?

Solutions

Expert Solution

(a) Describe serial Bond Issue.

Bond is one debt security issued by company or government to gather fund from market. Bond holder gets interest on invested amount.

Serial bonds are also known as instalment bonds. This bonds are issued at one time but with different maturity dates. Bond holder gets the principal amount back in pre-decided equal instalments. With Serial bond issue, issuer can divide repayment of principal amount in many different instalments instead of one time payment of huge amount. So, serial bond issue is a bond issue where repayment is done in many equal instalments.

(b) Why are serial bond issues preferred by issuer?

Serial bond issue is preferred by issuer because they don't have to repay the lump sum amount ant one time, instead they have to re pay the principal amount in many different instalment as per pre-decided agreement with bond holder.

The second reason is, issuer have to pay less interest comparatively, because in normal issue issuer have to pay interest on whole principal amount on maturity date, but in serial bond they just have to pay interest on unpaid instalments.

For example, if issuer has issued $ 50,000 serial bond with 5 year maturity with five equal instalments. Here, issuer will repay the $ 10,000 every year as principal amount to bond holder and now after every instalment issuer have to pay interest on unpaid money only. Here after first instalment repayment of $10,000 issuer have to pay interest on $40,000 at next maturity date.

So, it removes burden of lump sum amount payment on the date of maturity.

(c) Why serial bond issues preferred by bond holders?

With serial bond investor will get the principal amount plus interest sooner in equal instalments on regular intervals, they don’t have to wait for final maturity date to receive lump-sum amount they have invested. It decreases risk of getting back the investors money. It decreases default risk. It ensures periodic income to investors instead of lump-sum amount at last maturity date.

So, bond holders prefer the serial bond issue to decrease the risk of repayment, and also when investors don’t want to wait or long time to earn.


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