Bonds are a preferred investment option for many people since their inception. But, very few are familiar with the way it works. A bond is an investment instrument that yields fixed income, which essentially represents a loan made by an investor to a borrower. bonds are typically issued by companies, municipalities, states, and sovereign governments to finance projects and operations. Bond owners are debtholders, or creditors, of the issuer.
A bond can also be considered as a debt instrument extended by the investor to the borrower. It includes all the relevant details of the loan and its payments like the maturity date, interest rate, any other terms for variable or fixed interest payments to be made by the borrower, and any terms concerning early withdrawal. In the context of financial instruments, maturity is the state of being due for payment. However, to learn more about what the maturity date of a bond is, read on.
What is the maturity date concerning a bond?
The maturity date refers to the date when the principal amount of an investment, such as a bond, note, or other debt instrument becomes due and is repaid to the investor. Such a maturity date is typically printed on the certificate of the investment instrument in question and is set when it is issued.
At the maturity date of a bond, the principal investment is repaid to the investor, while the regular interest payments that were made out during the life of the bond, stop rolling in. Investors can redeem the accumulated interest and their capital without penalty. The maturity date can also be simply referred to as the termination date (due date) on which a loan must be paid back in full.
Breaking down maturity date
The maturity date establishes the lifespan of a security or an investment instrument. It informs the investors about when they would receive their invested principal back. For example, a 30-year mortgage has a maturity date three decades from the date it was issued and a 2-year bond has its maturity date twenty-four months from when it was first issued.
The maturity date also maps out the period through which the investors will receive interest payments. However, it is noteworthy that certain debt instruments, such as fixed-income securities (an investment instrument that provides a return in the form of fixed periodic interest payments), may be "callable." In this case, the issuer of the debt maintains the right to pay the principal back at any time. Thus, investors should make due inquiries before buying any fixed-income securities, as to whether the bonds are callable or not. For instruments like derivatives contracts futures or options, the term maturity date is interchangeably used with the contract's expiration date.
Term to maturity of a bond
Term to maturity is defined as the remaining life of a bond as a debt instrument. The duration can range from the time when the bond is issued until its maturity date when the issuer is meant to redeem the bond and pay its face value to the bondholder.
Classification of maturity periods
Maturity dates are used to sort bonds and other types of securities into one of three broad categories. Generally, a bond that matures within one to three years is termed a short-term bond. Medium or intermediate-term bonds are colloquially those that mature in four to 10 years, and long-term bonds are those with a maturity period that is greater than 10 years. A common long-term instrument is a 30-year Treasury bond. At the time of the issue of the bond, it begins extending interest payments, usually every six months, until the 30 years loan eventually matures.
Investors may choose among short-term bonds, medium or intermediate bonds, and long-term bonds when looking for fixed-income instruments. Their choice of investment is impacted by factors such as their risk tolerance, time frame, and objectives. Generally, short-term bonds come with low risk and low return. These are preferred by investors with a low risk appetite and a sense of security with their investments. It means they are willing to let go of higher returns offered by intermediate and long-term bonds to obtain greater stability and low risk.
On the other hand, long-term bonds provide higher returns but these come with greater risk. Long-term bonds freeze or lock in the investor’s funds for a longer period, which allows extended time for interest rates to influence the price of the bond. Investors with a higher risk tolerance would willingly park their money for long periods, in exchange for a higher return. However, long-term bonds are more volatile than other bond types. This means that they may not be appropriate for investors who seek recovery of their investment within three years.
This particular classification system is extensively used across the finance industry. It appeals to conservative investors who appreciate the clear charted timeline of when their principal will be paid back.
Final word
With investing, it is extremely important to know what you are signing up for. Bonds are safe investment instruments that one can explore. However, it is important to perform thorough personal research and analysis before you invest your hard-earned money.
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Frequently Asked Questions Expand All
What are bond coupon payments?
A coupon bond includes attached coupons and pays periodic – generally annual or semiannual – interest payments during its lifetime and its par value at maturity. These bonds come with a coupon rate, which refers to the bond’s yield at the date of issuance. Bonds that have higher coupon rates offer investors higher yields on their investment.
Do bonds have a maturity date?
Yes, the vast majority of bonds have a pre-set maturity date – a specific date when the bond must be paid back at its complete face value, called par value.
