I read it but still don`t got the difference between them, can someone to a very detailed on what are both of them?
Also if you wanna explain term is also a plus aha
From the perspective of an issuer sinking fund bonds (i.e. sinkers) and serial bonds have an important similarity. Both are types of bond issues that are retired over time before the stated maturity. However, from an investor’s perspective the two are completely different. With a serial bond issue an investor is buying a security with a specific (known) maturity date. A sinking fund issue results in the investor holding a bond with an unknow retirement date.
Serial bonds (common in the US municipal bond market) are issues sold in a single offering, but which has multiple maturity dates. For example, an issuer may sell a “20-year” serial bond issue in which the longest class of bonds (i.e. tranche) matures 20 years after the date of issuance. However, the security will have multiple tranches, each of which has a specific maturity date. Frequently, one of the tranches of the “20-year” issue will mature within a year or two of issuance. Typically, a portion of the issue will mature each year. Thus, by the end of 20 years only a small portion of the original principal remains to be retired at the ultimate maturity.
In a serial bond issue, an investor is acquiring a security that is part of a specific tranche. Consequently, the investor is buying a security with a known maturity. Absent a default by the issuer, the investor knows the length of time over which they would earn a coupon and the date upon which their principal will be returned.
A sinking fund bond will have a stated maturity date for the issue. However, the trust indenture contains a schedule that requires the issue to retire a minimum amount of principal by specified dates prior to maturity. From the issuer’s perspective that is similar to a serial bond. However, the situation for the investor is completely different. An investor in a sinking fund bond has no control over when the security they own will be retired.
Consider the following example: an issuer sells a €100,000,000 20-year sinking fund bond with the following sinking fund schedule contained in the bond’s trust indenture:
Minimum principal retirement
10th anniversary: €5,000,000 11th anniversary: €5,000,000 12th anniversary: €5,000,000 13th anniversary: €5,000,000 14th anniversary: €5,000,000 15th anniversary: €5,000,000 16th anniversary: €5,000,000 17th anniversary: €5,000,000 18th anniversary: €5,000,000 19th anniversary: €5,000,000
Assuming the issuer retires the principal exactly according to the sinking fund schedule the issue has an average life (i.e. Euro-weighted average time until retirement) of 17.25 years. However, there is no known maturity date on any individual bondholder’s investment since the bonds can be retired through at random par calls or secondary market repurchases (which the issuer will opt to do if the bonds are trading at a discount). The uncertain average life forces investors to analyze their securities from the perspective of the average life of the issue. However, for any bondholder the life of the investment in this example could be as short as 10 years or as long as 20 years (or anytime in between).