Maturity Date

Definition

The maturity date is the specific date on which a bond's principal amount is due to be repaid to the bondholder. It marks the end of the bond's term and can influence its pricing, interest rate, and risk profile. Understanding the maturity date helps investors assess when they will receive their investment back and how interest rate changes may impact the bond's value before that date.

5 Must Know Facts For Your Next Test

1. Maturity dates can range from short-term (a few months) to long-term (several decades), affecting investor preferences based on their financial goals.
2. Bonds that are closer to their maturity date are generally less sensitive to interest rate changes compared to longer-term bonds.
3. The maturity date can impact a bond's liquidity; bonds nearing maturity are often easier to sell in secondary markets.
4. On the maturity date, the issuer is obligated to repay the bondholder the face value, concluding any obligation for interest payments.
5. Maturity can affect credit risk; longer maturity bonds may carry higher risks if there are significant changes in market conditions over time.

Review Questions

• How does the maturity date of a bond influence its pricing and risk profile?
  • The maturity date significantly affects a bond's pricing and risk profile because it determines how long an investor's money is tied up and how sensitive the bond will be to interest rate fluctuations. Generally, longer maturity bonds are more susceptible to changes in interest rates, which can lead to greater price volatility. Additionally, as a bond approaches its maturity date, its price tends to converge toward its face value, impacting how investors view the risk of holding that bond over time.
• Compare and contrast short-term and long-term bonds in relation to their maturity dates and investment strategies.
  • Short-term bonds typically have maturity dates of one year or less and are considered lower risk due to their shorter duration. They provide quicker access to capital and are less affected by interest rate changes. In contrast, long-term bonds may have maturities extending beyond ten years, offering potentially higher yields but increased risk from market fluctuations. Investors may choose short-term bonds for safety and liquidity, while long-term bonds can be more appealing for those seeking higher returns over time despite their associated risks.
• Evaluate how changes in market interest rates affect bonds with different maturity dates and discuss potential investment strategies based on these changes.
  • Changes in market interest rates have varying impacts on bonds depending on their maturity dates. When interest rates rise, long-term bonds typically see more significant declines in price than short-term bonds because they lock in lower rates for a longer period. Conversely, when rates fall, long-term bonds can experience substantial price increases. Investors might adopt strategies like laddering, where they invest in bonds with staggered maturities to balance interest rate risks while ensuring regular cash flow. This approach helps mitigate potential losses during rising rate environments while still capitalizing on lower-rate opportunities.

Related terms

Coupon Rate: The coupon rate is the interest rate that the issuer of the bond agrees to pay to bondholders, typically expressed as a percentage of the face value.

Face Value: The face value is the nominal value of a bond that the issuer agrees to pay back at maturity, also known as par value.

Yield to Maturity:

Yield to maturity is the total return anticipated on a bond if it is held until it matures, taking into account all coupon payments and any difference between the purchase price and face value.