Definition
Medium-Term Notes (MTNs) are debt securities issued by corporations and governmental entities that typically mature in five to ten years. Unlike bonds, which are typically issued all at once, MTNs are offered to investors continuously through an agent. They can be customized to fit specific needs with different maturity dates, interest rates, and currencies.
Key Takeaways
- Medium-term notes (MTNs) are a form of debt security that allows companies to raise capital on more flexible terms than other debt instruments. They can have various maturities, typically from 5 to 10 years.
- MTNs can be issued on an ongoing basis, allowing issuers to adjust the amount and terms according to their financing needs and market conditions. This makes them highly flexible and suitable for a variety of financing strategies.
- Despite their flexibility, MTNs carry a level of risk. They are not insured by the Federal Deposit Insurance Corporation, meaning that the repayment of principal and interest is not guaranteed. This places the investor in the position of bearing the credit risk of the issuer.
Importance
Medium-term notes (MTNs) are an important financial instrument chiefly because they provide a flexible means for companies or organizations to raise capital.
They offer more customized borrowing and investing options for both the parties involved, i.e., the issuer and the investor.
This flexibility extends to various characteristics of the note, including its maturity (which typically ranges from 1-10 years), interest payment structure, and even the option for early redemption.
Additionally, since it’s an unsecured debt, the borrowing costs for issuing companies can be lower than traditional bonds, depending on the company’s credit rating.
MTNs thereby can support companies in aligning their funding strategies with their financial goals efficiently.
Explanation
Medium-Term Notes (MTNs) play a crucial role in the financial markets as valuable debt instruments allowing borrowers to raise capital to finance their operations and projects. Specifically, corporations, municipalities, or governmental entities may issue these notes to fund different kinds of operational needs such as the development of infrastructure, new projects, or even day-to-day functions.
The term “medium” in MTNs refers to their lifespan, which typically ranges from one year to ten years, making them a flexible financing option as they offer a middle ground between short-term and long-term borrowing. MTNs are particularly advantageous because they can be customized to meet the specific financing requirements of the issuer.
That is, the note’s face value, interest rate, maturity period, and other terms may be tailored according to the financial needs and repayment capacity of the borrower. They can be issued continuously to investors directly or via dealers, as and when required, providing the borrower with the ability to raise funds on a rolling basis without needing to go through the often time-consuming and costly process of issuing securities in the capital market each time.
They are a cost-effective and flexible method of raising funds for issuers while providing a relatively secure investment mechanism for investors.
Examples of Medium-Term Notes
Apple Medium-Term Notes: Apple Inc., one of the world’s leading technology companies, has issued medium-term notes as a part of its capital raising strategy. For example, in 2016, the company issued medium-term notes worth $
5 billion with a maturity of five years. The funds raised were used for general corporate purposes, including stock buybacks, dividend payments, funding for working capital, capital expenditures, acquisitions, and repayment of debt.
Goldman Sachs Medium-Term Notes: Financial institutions like Goldman Sachs often issue medium-term notes as funding instruments. For example, in August 2021, Goldman Sachs issued $
5 billion worth of medium-term notes due for maturity in 2026 as part of its MTNs program. The notes provide Goldman Sachs with working capital while granting investors a return over a pre-determined fixed period.
Verizon Medium-Term Notes: Verizon Communications, the telecommunications giant, has also used medium-term notes as part of their financing strategy. In March 2020, the company issued $1 billion in 10-year medium-term notes. These notes gave Verizon some financial flexibility in dealing with operational costs, whilst offering a steady income to note-holders over the 10-year period until maturity.
FAQs on Medium-Term Notes
What are Medium-Term Notes?
Medium-Term Notes (MTNs) are debt instruments that usually mature in 5–10 years. Unlike short-term notes, MTNs are not immediately funded upon issuance and can be offered continuously, making them a flexible source of funding for corporations and financial institutions.
How do Medium-Term Notes work?
Medium-Term Notes work by a corporation or financial institution issuing notes or bonds to an investor. The investor in return provides cash to the issuer. The issuer then pays the investor interest over the life of the note. At the end of the term, the issuer returns the principal amount to the investor.
What are the benefits of Medium-Term Notes?
The benefits of Medium-Term Notes include flexibility in terms and conditions, relatively low issuance costs, and the ability to tap into the market at variable times. They are a great way for businesses to raise capital and adapt borrowing to meet specific needs.
What are the risks associated with Medium-Term Notes?
The risks associated with Medium-Term Notes include credit risk, interest rate risk, and liquidity risk. If the issuer defaults, the investor may lose the principal amount. Changes in interest rates may affect the price of the notes. Lastly, there is no guarantee that a liquid secondary market will exist for MTNs, which could make them harder to sell.
Where can I buy Medium-Term Notes?
Medium-Term Notes can be purchased directly from the issuer or through a broker-dealer. It’s recommended to consult with a financial advisor or broker before purchasing MTNs, as they can help you understand the risks and rewards associated with these instruments.
Related Entrepreneurship Terms
- Face Value: The nominal value or dollar value of a security stated by the issuer, and is also known as “par value”. For medium-term notes, this is the value that will be returned to the holder at maturity.
- Maturity Date: The date on which the life of a medium-term note ends and the principal is repaid to the investor.
- Interest Rate: The percentage of the loan value that the issuer promises to pay to the holder of the medium term note.
- Secondary Market: The marketplace where investors purchase securities or assets from other investors, instead of from issuing companies themselves. Medium-term notes are often sold in this market.
- Credit Rating: An assessment of the creditworthiness of a borrower in general terms or with respect to a particular debt or financial obligation. It can affect the interest rate of a medium-term note.
Sources for More Information
- Investopedia: This site is great for information about any financial term, including Medium-Term Notes. It can provide definitions, descriptions, and useful contexts.
- Reuters: Reuters is an international news organization where you can find real-time news, investment information, and other financial data related to Medium-Term Notes.
- Bloomberg: On Bloomberg, you can find news, market data, analysis, and articles related to Medium-Term Notes and the broader financial industry.
- Moody’s: Moody’s is well-known for its research and analysis on bonds and credit ratings. Their resources could provide you with beneficial information and insights on Medium-Term Notes.
