Which of the following definitions describes a serial bond? Multiple Choice Matures in installments. Matures on a single date. Secured only by the “full faith and credit” of the issuing corporation. Supported by speclic assets pledged as collateral by the issuer.
The Correct Answer and Explanation is :
The correct answer is: Matures in installments.
Explanation:
A serial bond refers to a bond that is issued in a series, where a portion of the principal amount matures at different intervals, as opposed to a term bond, which matures all at once on a single maturity date. Serial bonds are structured in such a way that each bond within the series has its own specific maturity date, typically spread over several years. This allows the issuer to manage its debt burden more effectively by spreading out the payments over time.
The key characteristics of serial bonds include:
- Installments: As mentioned, serial bonds mature in installments, with portions of the total bond issue maturing each year. This means that rather than paying the entire principal amount at once, the issuer repays a portion of the principal each year.
- Issued by corporations or municipalities: Serial bonds are often issued by municipalities to finance projects with long-term needs (such as infrastructure), or by corporations to raise capital for their activities.
- Interest payments: The bondholder receives interest payments, typically on an annual basis, until the bond matures. After the bond matures, the principal is returned.
The other options in the question refer to different types of bonds:
- Matures on a single date: This describes term bonds, not serial bonds. In term bonds, the entire principal amount is due on a specific date.
- Secured only by the “full faith and credit” of the issuing corporation: This refers to general obligation bonds or unsecured bonds that do not have collateral backing them, also known as debentures.
- Supported by specific assets pledged as collateral by the issuer: This describes secured bonds, where the bond is backed by specific assets, such as property or equipment, which can be seized if the issuer defaults.
Thus, the defining characteristic of a serial bond is that it matures in installments over time.