Definition And Understanding Medium Term Note
A medium term note is a note that usually matures in 5 to 10 years. A corporate medium term notes can be continuously offered by a company to investors through a dealer with investors being able to choose from differing maturities, ranging from nine months to 30 years, though most medium term notes range in maturity from one to 10 years.
Medium term is an asset holding period or investment horizon that is intermediate in nature. The exact period of time that is considered medium term depends on the investor’s personal preferences, as well as on the asset class under consideration. In the fixed-income market, bonds that have a maturity period of five to 10 years are considered to be medium-term bonds. A day trader who seldom holds open positions overnight may consider a stock that is held for a couple of weeks as a “medium term” position, whereas a long-term investor may define medium term as a holding period of one to three years. Similarly, homeowners may regard anything less than 10 years as a medium-term horizon when it comes to real estate.
Information About Medium Term Notes
By knowing that a note is medium term, investors have an idea of what its maturity will be when they compare its price to that of other fixed-income securities. All else being equal, the coupon rate on an medium term notes will be higher than those achieved on short-term notes. For corporate medium term notes, this type of debt program is used by a company so it can have constant cash flows coming in from its debt issuance; it allows a company to tailor its debt issuance to meet its financing needs. Medium-term notes allow a company to register with the Securities and Exchange Commission only once, instead of every time for differing maturities.
Facts About Medium Term
Determining an investments horizon, or term, is often based on the intention behind the investment more than the investment itself, such as when the funds will be used for other goals, or whether a lump sum or an income stream is the desired result. The most common terms are generally considered short, medium and long.
Though the term does not necessarily denote a specific length of time, most consider anything below three years to be short-term; from three to 10 years as medium term; and anything beyond 10 years to be long term. Since these time frames are considered flexible, what may be a medium-term investment for one person may feel like a long-term investment to others, and vice versa.
Advantages of Medium Term Notes
Medium term notes offer investors an option between traditionally short-term and long-term investments. This can be ideal for situations where the investor’s goals fall into a time frame beyond those offered by certain municipal bonds or short-term bank notes without having to commit to the long-term note options. Businesses can benefit from medium term notes based on their ability to provide a consistent cash flow from investors. Additionally, businesses can choose to offer medium term notes with or without call options.
While the rates associated with call options are often higher, the business maintains the right to retire or call the bond within a specified period of time before the bond reaches maturity. This allows businesses to take advantage of lower rates, should they occur before a bond series has reached maturity, by calling in the bond issue and then issuing new bonds at the lower rate. Non-callable options do not have the same level of risk regarding the duration of the investment, which leads them to be offered at lower rates.
Accessibility in Medium Term Notes
Investors looking to participate in the medium term notes market often have options regarding the exact nature of the investment. This can include a variety of maturity dates as well as dollar amount requirements. Since the term involved in an medium term notes is longer than those associated with short-term investment options, the coupon rate will often be higher on an medium term notes while being lower than the rates offered on some longer term securities.