Sunday, September 27, 2009

Recent Trends in Original Maturities of Bonds

There is a trend today toward shorter original maturities for corporate bonds due to inflation, rapid changes in technology, and heavy borrowing demands from other sectors of the economy. During the 1950s and 60s corporations usually found a ready market for 20-to 30-year bonds. Such long-term debt contracts were extremely desirable from the borrowing company's standpoint because they locked in relatively low interest costs for many years and made financial planning much simpler. Today, with inflation and other factors frequently sending market interest rates soaring to records levels, bonds and notes with 3- to 15-year maturities are becoming commonplace.
Some financial analysts expect to see a substantial number of corporate bonds issued in the future whose interest rates are indexed to commodity prices (especially silver and gold) or to the price of energy. These commodity-indexed bonds are designed to provide the investor a hedge against inflation and, as result, carry substantially lower coupon rates than conventional bonds. Another recent innovation is the issuance of zero-coupon bonds which carry no fixed rate of return but offer the investor the prospect of significant capital gains. Those bonds still issued with fixed interest rates may carry "openers" which call for periodic adjustments in the principal amount of the loan as interest rates change. In brief, the trend in corporate bonds today is toward shorter maturities and more flexible rate of return for the investor.

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