Debt Instruments – What are Medium Term Notes (MTN)?

What are Medium Term Notes (MTN)?

MTNs are obligations for periods of over a year and up to 5 years, but longer maturities are possible to suit investor demand. They are similar to bonds, but with more flexibility in terms of their maturity and the conditions under which they can be issued and traded.

Unlike Commercial Paper, they contain covenants more common in bond documentation, but can provide more flexibility than bonds in that relatively small amounts can be issued in a size, maturity, and currency to meet pockets of investor demand.

A bank can issue medium-term notes to raise capital needed. The notes can be sold to institutional and individual investors, who receive periodic interest payments and the return of the principal when the notes mature. The bank benefits from a steady source of financing for its expansion plans, while the investors benefit from a potentially higher return compared to a savings account or short-term investments.

How do Medium Term Notes reflect in financial statements?

Medium-term notes are typically reflected as a long-term liability on the balance sheet of a company. The issuance of MTNs results in an increase in the company’s liabilities, which is offset by the cash received from the sale of the notes. The interest payments on the MTNs are recorded as a periodic expense on the income statement, typically as “interest expense.” The principal amount of the MTNs is typically reduced through amortization on the balance sheet over the life of the notes. The maturity date of the MTNs and any associated redemption or call provisions may also be disclosed in the footnotes to the financial statements.

Benefits of Medium Term Notes

  1. Flexibility: MTNs offer issuers greater flexibility in terms of the size and timing of issuances compared to other debt securities such as bonds.
  2. Lower cost of capital: MTNs can provide a lower cost of capital for issuers compared to other debt securities, as they are typically offered to a smaller group of investors, reducing the cost of underwriting and distribution.
  3. Access to capital: MTNs allow companies to access capital markets for financing purposes, which can be especially useful for companies that are not yet publicly traded or do not have access to other traditional sources of financing.

Risks of Medium Term Notes

  1. Credit risk: MTNs are unsecured debt obligations and investors face the risk of default by the issuer. The creditworthiness of the issuer will impact the yield and market value of the notes.
  2. Interest rate risk: Interest rates can fluctuate over the life of the MTNs, affecting the market value of the notes and the yield received by investors.
  3. Market risk: MTNs are subject to fluctuations in market conditions and investor sentiment, which can impact the market value of the notes.
  4. Liquidity risk: MTNs may be less liquid than other securities and investors may have difficulty selling the notes in a declining market.

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