Munis come in a wide range of maturities, with most maturing in 1 to 20 years. New issues of municipal bonds may be structured to mature in one of two ways.
Term bonds are those in which the entire issue is scheduled to reach maturity on the same date and offers a single interest rate. A city that issues a $100 million bond with a maturity of 10 years will repay the entire $100 million principal when the bond comes due.
A serial bond is a bond issue whose maturities are staggered in equal installments over a specific time period. That same $100 million might come due in $10 million installments during each of the years of the bond’s 10-year life. Serial bonds with a shorter term pay a lower interest rate than bonds with a longer term.
Term bonds generally require that the issuer make periodic payments into a sinking fund to be assured that the issuer will have the required funds when the principal comes due. With term bonds, however, the issuer has the ability to redeem the bonds early, if it chooses. Perhaps the municipality has a surplus of cash or perhaps market conditions allow the bonds to be repurchased at a discounted price.
Serial bonds have the advantage of requiring fewer interest expenses over the life of the bond. As th