What is maturity?
In finance, maturity is the date agreed upon by the parties to a transaction or financial
instrument later to which it ought to be renewed, or it will cease to exist.
The term also defines the pre-decided date where the term of a contract or agreement
finishes to settle the total amount on a loan or bond back to the lender.
In other words, we can say that maturity is the date that pre-determines the lifeline of security,
thus informing the issuer about the last date of paying their principal and interests. Once the
maturity date is passed, the issuer becomes free from all the obligations related to the security.
Therefore, maturity is closely associated with deposits, foreign exchange spot trades,
interest rates, commodity swaps, forward transactions, loans,
and fixed income instruments such as bonds.
Frequently Asked Questions (FAQ)
Explain the term maturity date?
The maturity date can be defined as the due date of a principal amount of a note,
draft, acceptance bond, or other debt instruments. On this date, the principal amount is supposed to
be repaid to the investor. The date is usually mentioned on top of the financial papers or
printed on the certificates of the instrument. On this day only the principal amount is paid,
while the interests are paid throughout the life of the debt instrument to the investor.
The maturity date also represents the termination date of an installment loan.
It signifies that the loan must be paid back in full on the maturity date.
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How can bonds be categorised based on maturity date?
Bonds can be categorised into three categories based on maturity date:
Short-term bonds
Short-term bonds are the ones that have a maturity period of one to five years. These bonds are
generally issued by entities like investment-grade corporations, government institutions,
and companies rated below investment grades. Short-term bonds are preferred by bondholders
who want to preserve their funds for a shorter duration when favourable market conditions.
In addition, short-term bonds are easily accessible
than any other bonds, hence they are known to be very liquid.
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Intermediate bonds
Intermediate bonds are neither too short-term nor too-long term. These types of bonds come
with a maturity term of about five to ten years. As a result of an increased period,
the intermediate bond yields more money than short-term bonds but
not more than long-term bonds. Intermediate bonds are preferred by those investors who have a higher
level of risk tolerance power. Obviously, with a longer period, the risk increases,
and the investment is subjected to face a lot of ups and downs in the market.
Long-term bonds
Long-term bonds are usually identified by the ones that have maturity terms of about 10 to 30
years. These types of bonds do pay a much higher yield than any short-term or intermediate bonds.
Long-term bonds are preferred by investors who have higher levels of risk tolerance so
that they can go through several market fluctuations over the life of the bond.
Such investors aim to earn a huge revenue over a long period.
A long-term bond locks an investor with his investments for a relatively long period.
However, that can be changed if there is a call facility or if
the bond is a convertible one (convertible bonds).
How can relationship between maturity date, coupon rate, and yield to maturity be explained?
Bonds that have a long-term maturity offer coupon rates to investors similar to the quality
bonds offered in the case of short-term bonds. The reason behind offering coupon rates are:
Risk of defaulting loans of the government or the corporation increases.
Growth of inflation rate with time.