Seasoning

What Is Seasoning?

Seasoning alludes to the amount of time that has elapsed since a debt security has been issued and accessible to be publicly traded. Seasoning decides whether a premium or discount ought to be made for the bond in the secondary market.

A debt security will frequently be called "unseasoned" in the event that it has been traded for under a year, or "seasoned" assuming that it has been traded for more than a year with a decent repayment history. In the equity markets, a seasoned issue is otherwise called a seasoned offering or follow-on public offering (FPO), however new issues by blue-chip companies might be considered seasoned right away.

Figuring out Seasoning

Seasoning is a hypothetical period of time where recently issued bonds trade at prices which convert into a higher yields (for example at a discount) than those of comparable existing or seasoned bonds. The rationale is that it requires some investment for all of the information about an issuer or security to become known. The prices of the new issues in the end change, requiring a couple of months or years, to become comparable to the prices found in additional seasoned issues. In effect, the bond will converge to its optimal price in the wake of seasoning.

A higher yield on a bond addresses a higher cost of borrowing for the issuer. Seasoning, consequently, brings about additional costs to the borrower. To put it another way, the seasoning time is when new participants will experience interest rates on debt that is issued, and hence have higher debt ratios on average.

On the other hand, since material information appropriate to the pricing of these new securities isn't reflected in the issue price, investors have an opportunity to earn excess returns over those justified by the associated risks by investing in these securities.

Seasoning and Issue Reputation

Seasoning is one more approach to portraying investments in light of reputation, with that reputation based on a venture's history in the market. Investors are commonly more distrustful of new investments that don't yet have a proven record and are consequently bound to pay a premium for securities that are more secure. On account of a seasoned issue, the quality represented by having over 12 months of payments shows that the probability of the note being paid back in full is higher.

In the mortgage sector, seasoning alludes to the age of the mortgage. Ordinarily a mortgage is considered to be fully seasoned when it has been held for basically a year. Any holding period under a year will mean the mortgage is unseasoned, a period during which selling or refinancing the loan may not be approved by lenders, since the risk is higher and the reputation of the borrower isn't yet settled. In addition, most lenders won't let you cash out your equity or take out home equity lines of credit (HELOC) without full seasoning.

Features

• Seasoning is the passage of time associated with a security accessible for trading on the secondary market.
• New issues are considered unseasoned, while longer, more steady issues are seasoned.
• Subsequently, seasoned issues will generally be associated with less risk and a better reputation among investors.
• For bonds, a seasoned issue is one that has been traded for longer than a year and has not experienced any repayment issues.