Serial bonds are the most common type of municipal market bonds. Investors in serial bonds expect to receive their principal repayment on the stated maturity date and receive interest payments leading up to their principal repayment at the decided interest payment frequency. The value of each interest payment is simply calculated from the principal outstanding and the annual interest rate, or coupon, on the bond(s).
Below is a sample cash flow of a serial bond, with semi-annual interest payments:
Example:
Suppose a borrower issued $16,710,000 in serial bonds to fund a project. The bonds mature in years 2026 through 2030 and are non-callable. All five serial bonds will be priced to their stated maturity dates. Below is a combined cash flow of the five serial bonds:
What’s important here?
Many bond issuances have both serial bonds and term bonds. Serial bonds repay principal on their stated maturity dates, and are priced to either their stated maturity date or their call date, whichever produces a price that is cheaper to the investor. The cash flow received by the investor goes through the maturity date unless the bond is called earlier.
