Term To Maturity

DEFINITION of 'Term To Maturity'

The remaining life of a debt instrument. In bonds, term to maturity is the time between when the bond is issued and when it matures (its maturity date), at which time the issuer must redeem the bond by paying the principal (or face value). Between the issue date and maturity date, the bond issuer will make coupon payments to the bond holder.

BREAKING DOWN 'Term To Maturity'

Bonds can be grouped into three broad categories depending on their term to maturity: short term (1 to 5 years), intermediate term (5 to 12 years) and long term (12 to 30 years). The longer the term to maturity, the higher the interest rate will tend to be, and the less volatile a bond’s market price will be. Also, the further a bond is from its maturity date, the larger the difference between its purchase price (which fluctuates as market interest rates change) and its redemption value (also called principal, par or face value).

If an investor expects interest rates to increase, she will probably purchase a bond with a shorter term to maturity. She will do this to avoid being locked into a bond that ends up paying a below-market interest rate, or having to sell that bond at a loss to get capital to reinvest in a new, higher-interest bond. The bond’s coupon and term to maturity are used in determining the bond’s market price and its yield to maturity.

For many bonds, the term to maturity is fixed, but a bond’s term to maturity can be changed if the bond has a call provision, a put provision or a conversion provision.

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