A medium term note (MTN) is a note that usually matures in five to 10 years. A corporate MTN 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 MTNs range in maturity from one to 10 years.
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 MTN will be higher than those achieved on short-term notes. For corporate MTNs, 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 (SEC) only once, instead of every time for differing maturities.
MTNs 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 MTNs based on their ability to provide a consistent cash flow from investors. Additionally, businesses can choose to offer MTNs 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 Cal-able options do not have the same level of risk regarding the duration of the investment, which leads them to be offered at lower rates.
Investors looking to participate in the MTN 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 MTN is longer than those associated with short-term investment options, the coupon rate will often be higher on an MTN while being lower than the rates offered on some longer term securities.