Bonds: Why repay the principal at the maturity date all at once?


Many companies never intend to reduce their debt to zero. Instead, they rollover their debt:

Rather than paying off the principle of a debt when it comes due, you take out another loan for that amount to pay off the first debt. This will often be the same lender you owe the money to. The terms may change (due date, interest rate) and could be better or worse for the borrower depending on the interest rate environment (and of course his credit rating).

So to answer your question directly, these companies do not pay both principaland interest periodically because they aren't trying to reduce theirdebt. Instead they expect to roll it over.

Moreover, recall that the enterprise value of a business is the sum of itsmarket capitalization and its debt. From this perspective, a business is thought of as beingowned by both equity-holders and debt-holders. Assuming the business issuccessful, the debt holders expect periodic payments of interest and get paidfirst out of profits. The remaining profit is owned by the equityholders. Thus, these two classes -- the equity holders and the debt holders --together "own" the enterprise. These kinds of businesses generally do not seekto remove the debt holders from the business. The debt-to-equity ratio maybounce around, but generally never falls to zero because the debt is rolledover.

As long as the business remains sucessful, there is generally never a lack ofinvestors willing to buy debt. The main issue is the interestrate, not the availability of credit.

Businesses deploy the capital raised by debt issuances to fund projects andbuild the business. They do so with the belief that for every dollar theydeploy they can generate cash flow of more than a dollar. If they were to usesome of that cash flow to pay off principal, then they would have fewer dollarsto deploy funding projects and building the business. If they believe their rateof return is greater than their cost of capital, they should prefer to spendtheir dollars investing in projects instead of not paying off debt.


PS. There are such things as sinkable bonds which are

backed by a fund that sets aside money to ensure principal and interest payments are made by the issuer as promised.

Sinkable bonds are used to attract investors who may otherwise find thebusiness's creditworthiness too risky.


When I buy a bond I don't want the company to have the option of repaying the principal early. That's because they would do it at a time when it's to their benefit, typically because interest rates have gone down and they can borrow money more cheaply. But that means I lose the benefit of the higher interest rate that my bond carries, and I would have to reinvest the bond principal in a lower-yielding security.

That's why I don't buy callable bonds, which are bonds that the issuer can pay off early under certain specific conditions.


1) Corporates want to sell bonds. Using non-standard practices such as an amortising repayment schedule is not generally attractive to investors.

2) Corporates have funding profiles: averaged over all of their bonds they have a series of principal outflows which are well dispersed. Consider 1Y, 2Y, 3Y, 4Y, 5Y bonds in 100m each, as opposed to a single 5Y bond in 500m. This actually synthesises the structure of your question.

3) Options to repay early create callable bond. The embedded option is a cost to the corporate and a nuisance to risk manage, so why bother?