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Serial Bonds and TDR

A serial bond matures and pays back the principal amount in periodic installments over the life of the bond, rather than in a single payment at maturity like a traditional bond. This example describes a $50,000 five-year serial bond that would pay back $10,000 of principal each year in addition to interest payments, whereas a traditional bond would only pay interest for five years and the full $50,000 principal at the end. Investors prefer serial bonds because they receive portions of their investment back sooner while still earning interest payments.

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563 views

Serial Bonds and TDR

A serial bond matures and pays back the principal amount in periodic installments over the life of the bond, rather than in a single payment at maturity like a traditional bond. This example describes a $50,000 five-year serial bond that would pay back $10,000 of principal each year in addition to interest payments, whereas a traditional bond would only pay interest for five years and the full $50,000 principal at the end. Investors prefer serial bonds because they receive portions of their investment back sooner while still earning interest payments.

Uploaded by

Love alexchelle ducut
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Definition: A serial bond, sometimes called a serial note, is a debt security that matures and is payable at

periodic dates during its term or life. Thus, it is repaid over a number of periods instead of one specific
maturity date.

What Does Serial Bond Mean?

In other words, a serial bond matures in steps where a portion of the principle is payable at specific
dates during the bond’s life. This is unlike a traditional bond that matures at one date with the complete
principle payment coming due at the end of its bond term.

Example

Take a $50,000 five-year serial bond for example. This bond has a life of five years and could mature in
five equal payments. This means that in addition to interest, the bond issuer would have to make a
$10,000 principle payment each year until the full bond is paid off.

In contrast, a traditional five-year bond would pay interest for five years without making a single
principle payment. Then at the end of the term, the bond issuer would have to repay the entire principle
in one payment.

Investors often prefer serial bonds because they are guaranteed to get their investment back sooner. In
this case, the bondholders would get a fifth of their investment back each year in addition to the
interest.

If investors are unsure about the company and want to decrease their risk, they can also require that the
issuer set up a sinking fund before the bonds are issued. This requires the bond issuer to set aside assets
as a type of collateral for the bond payments.

Serial bonds are reported on the balance sheet of the bond issuer as a long-term liability. Conversely, the
bondholder reports these investments on its balance sheet as a current or non-current receivable in the
asset section.
Troubled debt restructuring

A troubled debt restructuring occurs when a creditor for economic or legal reasons related to its debtor's
financial difficulties grants a concession to the debtor that it would not normally consider. A debtor is
experiencing financial difficulties when one of the following conditions is present:

It is in default on any of its debt;

It is in bankruptcy;

It has securities that have been delisted;

It cannot obtain funds from other sources;

It projects that it cannot service its debt; or

There is significant doubt about whether it can continue to be a going concern.

A concession may involve restructuring the terms of a debt (such as a reduction in the interest rate or
principal due, or an extension of the maturity date) or payment in some form other than cash, such as an
equity interest in the debtor.

A debtor that can obtain funds from sources other than the lender at market interest rates is generally
not involved in a troubled debt restructuring.

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