What Is Maturity?

Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed or it will cease to exist. The term is commonly used for deposits, foreign exchange spot trades, forward transactions, interest rate and commodity swaps, options, loans, and fixed income instruments such as bonds.

Financial institutions sometimes temporarily alter maturity dates as part of a promotion to entice new investors. For promotional certificates of deposits (CDs), a bank may offer a higher rate of return for a short-term CD. At maturity, the promotional CD will generally renew at the rate and time frame of a standard CD.

Key Takeaways

  • Maturity is the agreed-upon date on which the investment ends, often triggering the repayment of a loan or bond, the payment of a commodity or cash payment, or some other payment or settlement term.
  • It's a term that is most commonly used in relation to bonds but is also used for deposits, currencies, interest rate and commodity swaps, options, loans, and other transactions.
  • The maturity date for loans and other debt can change repeatedly throughout the lifetime of a loan, should a borrower renew the loan, default, incur higher interest fees, or pay off the total debt early.
  • Nonpayment of a bond at maturity could result in the issuer defaulting on the obligation, which would then negatively impact the issuer's credit rating and ability to raise funds through future bond offerings.

Understanding Maturity

Some financial instruments, such as deposits and loans, require repayment of principal and interest on the maturity date. Others, such as foreign exchange (forex) transactions, provide for the delivery of a commodity. Still others, such as interest rate swaps, consist of a series of cash flows with the final one occurring at maturity.

Maturity of a Deposit

The maturity of a deposit is the date on which the principal is returned to the investor. Interest is sometimes paid periodically during the lifetime of the deposit, or at maturity. Many interbank deposits are overnight, including most euro deposits, and a maturity of more than 12 months is rare.

Maturity of Bonds

At the maturity of a fixed-income investment such as a bond, the borrower is required to repay the full amount of the outstanding principal plus any applicable interest to the lender. Nonpayment at maturity may constitute default, which would negatively affect the issuer's credit rating.

Term to maturity refers to the amount of time during which the bond owner will receive interest payments on their investment. Bonds with a longer term to maturity will generally offer a higher interest rate. Once the bond reaches maturity, the bond owner will receive the face value (also referred to as "par value") of the bond from the issuer and interest payments will cease.

Maturity of Derivatives

The term maturity can also be used concerning derivative instruments such as options and warrants, but it's important to distinguish maturity from the expiration date. For an option, the expiration date is the last date on which an American-style option can be exercised, and the only date that a European-style option can be exercised.

The maturity date is the date on which the underlying transaction settles if the option is exercised. The maturity or expiration date of a stock warrant is the last date that it can be exercised to purchase the underlying stock at the strike price.

The maturity on an interest rate swap is the settlement date of the final set of cash flows.

Maturity of Foreign Exchange

The maturity date (also known as the value date) of a spot foreign exchange transaction is two business days, with the exception of U.S. dollar versus Canadian dollar transactions, which settle on the next business day. The maturity date on a foreign exchange forward or swap is the date on which the final exchange of currencies takes place. It can be anything longer than the spot.

Special Considerations

The maturity of an investment is a primary consideration for investors since it has to match their investment horizon. An investment horizon can potentially range from as short as a few days to decades, depending on how long the investor intends to hold the investment in order to achieve their objectives.

For example, homebuyers who are saving money for the down payment on a home that they intend to purchase within a year would be ill-advised to invest in a five-year term deposit. A better alternative in this scenario would be to consider a money market fund or a one-year term deposit.

Article Sources

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  1. Federal Reserve Bank of New York. "FX Volume Survey Explanatory Notes." Accessed June 6, 2021.

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