What’s a term bond?

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Term bonds are new bonds issued by a municipality and have a single maturity date. The term bond may be issued as a stand-alone bond or include several term bonds issued under the umbrella of a series bond issue. In all cases, the bond or bonds that are part of the bond issue term will have the same maturity.

The use of a term bond approach is very common. Along with frequent use as a platform for municipal bonds, the term bond is also used with many corporate bond issues. Part of the attraction is that the single maturity date makes managing the bond clean and simple. When the maturity date is reached, the bondholder is paid the amount owed by the bond issuer, and the agreement is considered complete.

For the investor, a term bond situation can also be attractive. Due to the structure of the principle payment and dividends at the point of maturity, there are no taxes to pay during the life of the bond. Instead, the bondholder will pay taxes on the dividends earned at the time the bond matures. While this can mean a considerable tax liability when the term of the bond reaches maturity, the wise investor will take steps to use all legal means to minimize taxes due on other holdings and investments. This action will help partially absorb the impact of the one-time payment on the term bond.

Like most types of bonds, a term bond can be called or converted into points before maturity is reached. When this happens, the terms and conditions attached to the bond issuance will determine the amount of profit the investor will make on the named term bond. Therefore, it is a good idea for the investor to read all the terms and understand what type of dividends will be paid in the event that the term bond is called before the maturity date. By understanding both the amount of return if the bond remains outstanding to maturity and the benefit that will result if the bond is called sooner, it is easier to decide whether the bond issue is a good investment.

Smart Asset.

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