Medium term debt

What is medium or medium term debt?

Medium-term debt (also known as intermediate) is a type of bond or other fixed income security that has a maturity date set between two and 10 years. Bonds and other fixed income products tend to be classified by their maturity dates, as this is the most important variable in performance calculations.

Intermediate debt can be contrasted with short-term and long-term debt securities.

Key takeaways

  • Intermediate or medium-term debt refers to bonds issued with maturities between two and 10 years.
  • The returns on these fixed income securities tend to range between short-term and long-term debt.
  • With a recent decline in long-term debt issuance, medium-term debt has become more important for issuers and investors.

Understanding medium and medium term debt

Debt is generally classified in terms of maturity. There are three terms of debt: short, long and medium term debt. A short-term debt security is one that matures in a short period of time, usually within a year. An example of short-term debt is a Treasury bill, or Treasury bill, issued by the United States Treasury with terms of four, 13, 26, and 52 weeks.

Long-term debt refers to fixed income securities that mature more than 10 years from the date of issue or purchase. Examples of long-term debt include 20-year and 30-year Treasury bonds. Long-term debt is more sensitive to changes in interest rates than short-term debt, since there is a greater probability that interest rates will rise in a longer period of time than in a longer period of time. short.

In recent years, there has been a steady decline in long-term bond issuance. In fact, the 30-year US Treasury bond was suspended in 2002 when the spread between medium- and long-term bonds reached record lows. Although the 30-year Treasury was revived in 2006, for many fixed-income investors, the 10-year bond became the “new 30-year” and its rate was considered the benchmark rate for many calculations.

Medium or medium-term debt is classified as debt with a maturity of two to ten years. Typically, the interest on these debt securities is higher than that of short-term debt of similar quality, but less than that of long-term bonds with similar ratings. The interest rate risk of medium-term debt is higher than that of short-term debt instruments, but less than the interest rate risk of long-term bonds.

Also, compared to short-term debt, medium-term debt carries a higher risk that higher inflation could erode the value of expected interest payments. Examples of medium-term debt are Treasury notes issued with maturities of two to ten years.

Profitability and intermediate-term bonds

During the life of a medium-term debt security, the issuer can adjust the maturity or nominal yield of the bond according to the needs of the issuer or market demands, a process known as shelf posting. Like regular bonds, medium-term notes are registered with the Securities and Exchange Commission (SEC) and are also often issued as coupon instruments.

The yield on a 10-year Treasury bond is an important metric in financial markets, as it is used as a benchmark that guides other interest rates, such as mortgage rates. The 10-year Treasury is sold at auction and indicates the level of consumer confidence in economic growth. For this reason, the Federal Reserve looks at 10-year Treasury yields before making its decision to change the federal funds rate. As yields on 10-year Treasury notes rise, so do interest rates on 10- to 15-year loans, and vice versa.

The Treasury yield curve can also be analyzed to understand where an economy is in the business cycle. The 10-year note is somewhere in the middle of the curve, and therefore provides an indication of how much return investors need to tie their money down for ten years. If investors believe that the economy will improve in the next decade, they will require a higher return on their investments in the medium and long term. In a standard (or positive) yield curve environment, intermediate-term bonds pay a higher return on a given credit quality than short-term bonds, but a lower return compared to long-term bonds (plus of 10 years).

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Mark Holland

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