What does 'Maturity Date' mean
Maturity date is the date on which the principal amount of a note, draft, acceptance bond or another debt instrument becomes due and is repaid to the investor and interest payments stop. It is also the termination or due date on which an installment loan must be paid in full.
BREAKING DOWN 'Maturity Date'
The maturity date defines the lifespan of a security, informing you when you will get your principal back and for how long you will receive interest payments. However, it is important to note that some debt instruments, such as fixed-income securities, are "callable", which means that the issuer of the debt is able to pay back the principal at any time. Thus, investors should inquire, before buying any fixed-income securities, whether the bond is callable or not.
Classifications of Maturity
Maturity date is used to classify bonds and other types of securities into broad categories of short-term, medium-term and long-term. This classification system is used widely in the finance industry. A short-term bond matures in one to three years, a medium-term bond matures in four to 10 years and a long-term bond matures in over 10 years. A common type of long-term bond is a 30-year U.S. Treasury Bond. A 30-year Treasury bond, at its time of issue, offers interest payments for 30 years (every six months in the case of a Treasury Bond) and, in 30 years, the principle it loaned out.
Relationships Between Maturity Date, Coupon Rate and Yield to Maturity
A bond with a longer term to maturity, or remaining time until its maturity date, tends to offer a higher coupon rate than a bond of similar quality but with a shorter term to maturity. This is for a couple of reasons. First, the default risk of a corporation or government increases the further into the future you project. Second, the expected inflation rate is also higher the further you go out into the future, which must be incorporated into the rate of return that an investor receives.
To illustrate, consider the situation of an investor who in 1986 bought a 30-year Treasury bond with a maturity date of May 26, 2016. Using the Consumer Price Index (CPI) as the metric, the hypothetical investor experienced an increase in U.S. prices, or rate of inflation, of over 218% during the time he held the security. This is a glaring example of how inflation becomes greater over time.
Another important behavior to observe is that as a bond grows closer to its maturity date, its yield to maturity and coupon rate begin to converge. This is because a bond's price is less volatile the closer it is to maturity.