Term and Serial Bonds

Definition

The financial accounting phrases term and serial bonds refer to indentures or contracts entered into by companies that represent a promise to pay.  The maturity of bonds payable can be of two forms.  Term bonds mature on a single date, while serial bonds mature in installments.

Since bonds payable represents long term obligations of the company, they are shown in the long term liabilities section of the balance sheet.

Explanation

Issuing long-term bonds represents an important source of financing for many large companies.  Bonds payable is used to categorize the payments due when a company issues an indenture, or enters into a contract that represents a promise to pay.

The maturity date of a specific bond issue generally takes one of two forms:

  • Term Bonds:  these are indentures of the same issue that also have the same maturity date.  Term bonds are commonly issued by large companies and government entities with maturities ranging from ten to 30 years.
  • Serial Bonds:  these are indentures of the same issue that mature at regular intervals, typically over several years.  Serial bonds are usually issued to finance projects that provide a regular stream of income that can be used to repay the debt over time.  For example, a township may issue serial bonds to build a new school, and then levy a tax on the residence of the community to repay the debt.

Serial bonds are usually quoted using their yield, while term bonds are quoted using their price.

Term bonds sometimes carry a call feature that allows the issuer to redeem the bonds prior to their maturity date.  If the indenture carries this provision, it will include a schedule of redemption dates and prices.

Related Terms

liabilities, long-term liabilities, interest expense, convertible bonds, adjustment bond