What is Maturity Date?
The maturity date is the date on which the principal amount of a note, draft, acceptance bond or other debt instrument becomes due. On this date, which is generally printed on the certificate of the instrument in question, the principal investment is repaid to the investor, while the interest payments that were regularly paid out during the life of the bond, cease to roll in. The maturity date also refers to the termination date (due date) on which an installment loan must be paid back in full.
Breaking Down Maturity Date
The maturity date defines the lifespan of a security, informing investors when they will receive their principal back. The date also delineates the period of time in which investors will receive interest payments. However, it is important to note that some debt instruments, such as fixed-income securities, may be "callable," in which case the issuer of the debt maintains the right to pay back the principal at any time. Thus, investors should inquire, before buying any fixed-income securities, as to whether the bonds are callable or not.
--The maturity date refers to the moment in time when the principal of a fixed income instrument must be repaid to an investor.
--The maturity date likewise refers to the due date on which a borrower must pay back an installment loan in full.
--The maturity date is used to classify bonds into three main categories: short-term (one to three years), medium-term (10 or more years), and long term (typically 30 year Treasury bonds).
--Once the maturity date is reached, the interest payments regularly paid to investors stop coming.
Classifications of Maturity
Maturity dates are used to sort bonds and other types of securities into one of the following three broad categories:
- Short-term: Bonds maturing in one to three years
- Medium-term: Bonds maturing in 10 or more years
- Long-term.: These bonds mature in longer periods of time, but a common instrument of this type is a 30-year Treasury bond. At its time of issue, this bond begins extending interest payments--generally every six months, until the 30 years loan finally matures.
This classification system is widely used across the finance industry, and appeals to conservative investors who appreciate the clear time table, as to when their principal will be paid back.
Relationships Between Maturity Date, Coupon Rate and Yield to Maturity
Bonds with longer terms to maturity tend to offer higher coupon rates than similar quality bonds, with shorter terms to maturity. There are several reasons for this phenomenon. First and foremost, the risk of the government or a corporation defaulting on the loan increases, the further into the future you project. Secondly, the inflation rate expectedly grows higher, over time. These factors must be incorporated into the rates of return fixed income investors receive.
To illustrate this, consider a scenario where an investor who in 1996 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 increases over time. Furthermore, as a bond grows closer to its maturity date, its yield to maturity and coupon rate begin to converge, because a bond's price grows less volatile, the closer it comes to maturity.
[Important: With callable fixed income securities, the debt issuer can elect to pay back the principal early, which can prematurely halt interest payments doled out to investors.]