A term bond is a combination of several maturities with multiple principal payment dates that have the same coupon, yield, and price.
Term bonds are created because the yield curve is usually flat during the term bond’s multiple maturities, or to increase the size of the security to boost investor interest. The term bond contains maturities prior to the stated term maturity date, which are called sinking fund payments or sinkers. The buyer of a term bond knows the structure of the term bond – the maturities of the sinkers – and knows that if they buy a term bond, portions of the final maturity amount come due on each sinking fund date.
Sample Cash Flow of a single term bond:
Note: The yield and price are the same for sinkers and the final maturity of the term bond.
What's important here?
While term bonds might increase the cost of the bond sale to the borrower because sinkers are priced to a longer final maturity at a higher yield, term bonds can help generate more demand for a borrower’s bond sale and are a common part of a public sale of debt securities, especially for longer-dated securities.
It’s common for a borrower’s issuance to contain both term bonds and serial bonds, with term bonds usually placed in the middle and back end of the principal amortization schedule.
