What is Medium Term Note ?
409 reads · Last updated: December 5, 2024
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.
Definition
Medium-term notes (MTNs) are debt securities that typically mature in five to ten years. Companies can continuously offer notes with varying maturities to investors through dealers, with maturities ranging from nine months to thirty years, but most MTNs have terms of one to ten years.
Origin
MTNs originated in the United States in the 1980s, initially designed to meet companies' needs for flexible financing tools. As the market evolved, MTNs became an important means of corporate financing, especially during periods of significant interest rate fluctuations.
Categories and Features
MTNs can be classified based on maturity, interest rate type, and issuance method. By maturity, they can be short-term (1-5 years) or medium-term (5-10 years). Interest rates can be fixed or floating. In terms of issuance, MTNs are typically issued through private placements or public markets, offering flexibility and diversity.
Case Studies
Case Study 1: General Electric (GE) raised substantial funds in the early 2000s by issuing MTNs to support its business expansion and acquisition activities, helping GE maintain competitiveness in global markets. Case Study 2: Apple Inc. issued MTNs in 2013 to take advantage of the low-interest-rate environment, funding its stock buyback program and dividend payments. This strategy effectively optimized Apple's capital structure.
Common Issues
Investors may face interest rate risk and credit risk when purchasing MTNs. Rising interest rates can lead to a decrease in the value of the notes, while a deterioration in the issuing company's creditworthiness can affect the notes' repayment ability. Investors should carefully assess the issuing company's financial health and market interest rate trends.
