A maturity date is a crucial concept in finance, defining when the principal amount of a note, draft, acceptance bond, or any other debt instrument becomes due. This date also marks the termination of the relationship between the debtor and creditor or the investor and debt issuer. Once the maturity date is reached, the principal investment is repaid to the investor, and interest payments cease.
Key Takeaways
- The principal of a fixed-income instrument is repaid to an investor on the maturity date.
- The maturity date indicates when a borrower must pay an installment loan in full.
- Bonds are categorized into short-term, medium-term, and long-term based on their maturity dates.
- Once a maturity date is reached, the debt agreement ends, and interest payments stop.
- Issuers of callable securities may repay the principal balance before the maturity date.
How Maturity Dates Work
Though investing and borrowing differ, they share the concept of a maturity date, marking the end of the relationship between investors and issuers, and borrowers and creditors. Here’s how it typically works:
- A two-year certificate of deposit (CD) has a maturity date 24 months after issuance, at which point the principal is repaid to the investor.
- A 30-year mortgage’s maturity date is three decades from issuance, providing a deadline for full repayment.
Maturity dates also define the timeframe for interest payments. For derivatives such as futures or options, maturity can refer to the contract’s expiration date.
Certain debt instruments, like fixed-income securities, may be callable—allowing issuers to repay the principal before maturity. Investors should verify the callable status of bonds before purchase to understand potential early repayment scenarios.
Special Considerations
Bonds with longer maturity terms often offer higher coupon rates due to increased risks, including potential default and inflation over time. These factors affect the rate of return fixed-income investors can expect.
Bonds become less volatile as they approach their maturity dates, stabilizing their prices.
Types of Maturity Dates
Maturity dates classify bonds and other securities into three broad categories:
- Short-Term: Maturity within one to three years.
- Medium-Term: Maturity within 10 or more years.
- Long-Term: Maturity extends beyond a significant period, e.g., 30-year Treasury bonds.
These classifications apply broadly across financial instruments like CDs, loans, and mortgages.
Example of a Maturity Date
Consider an investor buying a 30-year Treasury bond in 1996 with a maturity date of May 26, 2016. Over that period, inflation significantly affected the principal’s value. As the bond nears maturity, its yield to maturity and coupon rate converge, and upon maturity, the investor receives the full principal balance.
How to Determine a Bond’s Maturity Date
Bond documents provided during issuance will specify the final maturity date, usually found in the Authorization, Authentication, and Delivery section.
How Does the Maturity Date Affect Interest Rates?
Longer-term bonds generally offer higher interest rates due to increased risk exposure. Investors must consider if the higher yield compensates for the additional risks.
What Happens If a Company Defaults on Its Bonds?
In case of a company’s bankruptcy and bond default, bondholders claim the company’s assets based on bond types (secured or unsecured). Priority of claims is sorted in bankruptcy court alongside other creditors.
The Bottom Line
The maturity date of a bond or other debt instrument determines when investors receive their principal investments back and when interest payments cease. For conservative investors, this clear schedule is advantageous. In loans, the maturity date signifies when the borrower must repay the loan in full, marking the end of the debt agreement.
Related Terms: certificate of deposit, creditor, fixed-income securities, callable bonds, coupon rates.
References
- Investor.gov. “Callable or Redeemable Bonds”.
- Investor.gov. “Corporate Bonds”.
- TreasuryDirect. “Treasury Bonds”.
- Internal Revenue Service. “Understanding Bond Documents”, Page 132.
- SEC. “What Are Corporate Bonds?” Page 2.
