Which of the following definitions describes a serial bond? Matures in installments. Supported by specific assets pledged as collateral by the issuer. Secured only by the “full faith and credit” of the issuing corporation. Matures on a single date.
The Correct Answer and Explanation is:
The correct answer is: Matures in installments.
A serial bond is a type of bond issue that matures in installments over a period of time, rather than on a single maturity date. This means that instead of the bondholder receiving the full principal amount at once when the bond matures, they receive partial payments at regular intervals, which reduce the outstanding principal amount gradually.
Serial bonds are often issued in a series, with each portion of the issue having its own maturity date. This can help the issuer manage cash flow more effectively by spreading out the principal repayment over time. It can also benefit investors who want a predictable income stream and the option to redeem bonds in phases, rather than waiting for the full maturity date.
For example, an issuer might issue a $10 million serial bond, with $1 million maturing each year for ten years. In this case, the bondholder will receive $1 million of the principal each year, along with interest on the remaining principal balance. The issuer may offer these bonds in a way that makes the repayment plan more attractive, as they offer staggered maturity dates, giving the investor more flexibility.
Now, let’s look at the other options:
- Supported by specific assets pledged as collateral by the issuer: This is a definition of a secured bond, not a serial bond. A secured bond is backed by specific assets, such as real estate or equipment.
- Secured only by the “full faith and credit” of the issuing corporation: This describes an unsecured bond or debenture, which is not backed by specific assets but only by the issuer’s general creditworthiness.
- Matures on a single date: This describes a term bond, not a serial bond. A term bond has a single maturity date when the entire principal amount is paid back to bondholders.
Therefore, a serial bond specifically refers to bonds that mature in installments over time, which makes it unique compared to other types of bonds.
