Serial bonds are bonds which are issued on the same date but have different bond terms. This term is synonymous with the term installment bond.
A serial bond differs from a straight bond in that the bond principal is amortized by the lender via a series of installments throughout the term rather than via a lump-sum at the end of the term. To accomplish this, the issuer creates a series of bonds, each portion of which has a different maturity date. As each portion of the series matures, the issuer repays the principal of that portion of the bond series.
Maturation schedules vary between serial bond issues. For example, one company may issue a serial bond made up of term bond issues which mature in equal portions every year throughout the bond term. Another company may issue a serial bond made up of bond issues which mature over just part of the bond term (over the last 5 years of a 10-year term, for example).
The individual bond issues making up a serial bond may differ in size, although this arrangement is less common.
The interest paid out via coupons is based on the size of the full loan principal of all bond issues making up a serial bond series. Once a bond issue matures and its principal is amortized, you no longer earn a coupon for that bond issue.
Example: You buy a government bond with a face value of 1000 Swiss francs, a 5-year term and a 2% interest rate. The bond is divided into a series of five bond issues which, in equal portions, have 1-year, 2-year, 3-year, 4-year and 5-year terms. After the first year, one-fifth of the bonds mature and the issuer repays the 200 francs owed for those bonds plus 2% interest on the full 1000 francs (a 20-franc coupon). The second year the next issue matures and the issuer repays the 200 francs owed plus 2% interest on the full 800-franc loan (a 16-franc coupon). The third year, you earn 2% of 600 francs (a 12-franc coupon). The fourth year you earn 2% of 400 francs (an 8-franc coupon) and the fifth year you earn 2% of 200 francs (a 4-franc coupon). In this example, the total coupons add up to 60 francs.
If you were to buy a straight bond with the same face value of 1000 francs, the coupon would be 20 francs per year (2% of 1000 francs), or 100 francs in total. However, serial bonds are less risky than straight bonds because the loan is amortized throughout the term. If the issuer goes bankrupt within the bond term and its assets are not sufficient to cover its debt obligations, you will only lose the part of the bond principal which has not yet been repaid. In the case of a straight bond, you would lose the entire bond principal.
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