Maturity date

Definition

The maturity date is the specific date on which a bond's principal amount is due to be paid back to the bondholder. It marks the end of the bond's life, and until this date, the issuer must make regular interest payments, known as coupon payments, to the bondholder. Understanding the maturity date is crucial as it impacts an investor's cash flow, investment strategy, and overall risk assessment.

5 Must Know Facts For Your Next Test

1. Maturity dates can vary significantly, with some bonds maturing in just a few months while others may have terms extending for 30 years or more.
2. Bonds are categorized based on their maturity dates into short-term, intermediate-term, and long-term bonds, which influences their risk and return profiles.
3. When a bond reaches its maturity date, the issuer repays the principal to the bondholder along with any remaining interest payments.
4. Investors often consider the maturity date when constructing a diversified portfolio, as different maturity lengths can help manage interest rate risk and liquidity needs.
5. Market conditions can affect a bond's price as it approaches its maturity date; typically, bonds closer to maturity experience less price volatility.

Review Questions

• How does the maturity date affect an investor's cash flow and investment strategy?
  • The maturity date plays a vital role in shaping an investor's cash flow because it determines when they will receive their principal back and how long they will receive interest payments. Shorter maturity dates generally provide quicker access to funds but may offer lower yields, while longer maturities can yield higher returns but involve greater interest rate risk. Thus, investors align their portfolio strategies based on their cash needs and market conditions associated with different maturity lengths.
• Compare and contrast short-term and long-term bonds in relation to their maturity dates and associated risks.
  • Short-term bonds usually have maturities of one year or less, offering lower yields but reduced exposure to interest rate changes, making them less risky. In contrast, long-term bonds have maturities extending beyond ten years, typically yielding higher returns due to increased risk. However, they are more susceptible to price fluctuations from interest rate changes and inflation over time. Investors must weigh these factors when choosing between different types of bonds based on their risk tolerance and investment goals.
• Evaluate how changes in interest rates affect the market value of bonds as they approach their maturity dates.
  • As interest rates change, the market value of existing bonds fluctuates inversely. When rates rise, existing bonds with lower coupon rates become less attractive, leading to a decline in their market prices. Conversely, if rates fall, these bonds may increase in value due to their higher fixed coupon payments compared to new issues. As bonds approach their maturity dates, this effect diminishes because there is less time for interest rate fluctuations to impact their market prices, resulting in greater stability closer to maturity.

Related terms

Coupon Rate: The coupon rate is the annual interest rate paid on a bond's face value, expressed as a percentage. It determines how much income an investor receives from holding the bond.

Face Value: The face value, or par value, is the amount that the bond issuer agrees to pay back to the bondholder at maturity. It is also used to calculate interest payments.

Yield to Maturity: Yield to maturity (YTM) is the total return anticipated on a bond if it is held until it matures. It accounts for all future coupon payments and the difference between the purchase price and face value.