Debt Service Structure

New issues of municipal bonds may be structured to mature in one of two ways:

1.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. Term bonds are generally quoted in dollars or as a percentage of par (in bond points).

2.A serial bond is a bond issue that matures at regular intervals over a specific time period. For example, a $100 million serial bond might have $10 million due each year of the bond’s 10-year life. The bonds with a shorter term pay a lower interest rate than bonds with a longer term. Serial bonds are typically quoted by yield.

Term bonds sometimes 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. As long as the bonds are callable, term bonds give the issuer the ability to redeem the bonds early if it chooses.

Serial bonds have the advantage of reduced interest payments over the life of the bond. As the principal is paid off with its scheduled redemptions, the reduced principal provides a corresponding reduction of interest payments. However, serial bonds often do not allow the issuer to redeem bonds whenever it chooses. Redemptio