What Is a Straight Bond?

Malcolm Tatum

A straight bond is a bond issue that is relatively simplistic in structure and offers a high potential for continuing all the way to the original maturity date. Bonds of this type are usually configured to provide interest payments at specific times during the life of the bond, and offer a complete repayment of the principal investment at the time the bond matures. Considering the most basic of all types of bond issues, the straight bond is a great option for new investors or for seasoned investors who prefer to keep their investments as uncomplicated as possible.

Man climbing a rope
Man climbing a rope

Just about any type of entity can create and issue a straight bond. Owing to the straightforward nature of the configuration of the bond issue, this approach can often be used when a municipality wishes to raise money to fund some sort of improvement project, like repaving roads or building a new park in a section of town. In this scenario, the municipality may envision using proceeds from tax revenue collected to manage both the periodic payment of interest on the issued bonds, and possibly even use those collected tax revenues to settle the principal payments once the bond matures.

Businesses can also benefit from the use of a straight bond approach. If the proceeds collected from the bond are intended to aid in launching a new product, the company may be able to use a portion of its existing revenue stream to make the interest payments until the product begins to generate sales. At that point, the project may become self-sustaining, making it possible to fund all the remaining interest payments plus repay the principal to the investors without using other company assets.

A straight bond may carry a fixed rate of interest or be structured with a floating or variable interest rate. Typically, that interest rate will follow the current average interest rate, and will include some sort of minimum rate that will apply even if the average rate should slip below that amount. While the interest may be paid periodically during the life of the bond, it is also possible to structure the bond issue so that both the interest and the principal are repaid at the point of maturity. In terms of duration, the bond may be as little as a two or as much as ten years, depending on the nature of the project launched by the issuer. As long as the straight bond is issued by a reputable and financially stable entity, the chances of earning the projected return on the bond are very high.

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