A term bond is one of a group of bonds that all share the same maturity date. This approach is usually taken by the issuer to maximize its use of investor cash. Conversely, if the issuer had sold serial bonds, it would instead have to pay back some of the bonds at an earlier date, thereby reducing the period over which it could use the cash.

Advantages of Term Bonds

There are several advantages associated with term bonds, which are as follows:

Fixed maturity date. Investors and issuers know the exact date when the principal on a term bond must be repaid, allowing for better financial planning.
Predictability for investors. Investors receive fixed interest payments and a lump sum principal repayment at maturity, providing a clear return structure.
Efficient capital utilization. The issuing company can use the funds from a term bond issuance for long-term projects without the burden of repaying the principal in installments.
Easier to manage. Unlike serial bonds, which have staggered maturities, term bonds simplify debt management since there is only one maturity date.
Attractive for institutional investors. Many institutional investors, such as pension funds and insurance companies, prefer term bonds due to their predictability and potential for higher long-term yields.

These advantages make term bonds an attractive option for both issuers looking for long-term financing and investors seeking stable income with predictable repayment terms.

Disadvantages of Term Bonds

There are several disadvantages associated with term bonds from the perspective of the issuer, which are as follows:

Liquidity problems. The payback of a large group of term bonds at the same time can present a liquidity challenge for the issuer, which may deal with the situation by rolling over the debt into a new bond issuance.
Rollover rate. If the issuer plans to fund the payback of term bonds with a new issuance, it must accept whatever market rate is available as of the maturity date of the bonds being retired, which could be unfavorable, and may be higher than the coupon rate on the bonds being retired.