What is Maturity Date? - YouTube

What is maturity?

In finance, maturity is the date agreed upon  by the parties to a transaction or financial  

instrument later to which it ought to  be renewed, or it will cease to exist.  

The term also defines the pre-decided date  where the term of a contract or agreement  

finishes to settle the total amount  on a loan or bond back to the lender.

In other words, we can say that maturity is the  date that pre-determines the lifeline of security,  

thus informing the issuer about the last date of  paying their principal and interests. Once the  

maturity date is passed, the issuer becomes free  from all the obligations related to the security.  

Therefore, maturity is closely associated  with deposits, foreign exchange spot trades,  

interest rates, commodity swaps,  forward transactions, loans,  

and fixed income instruments such as bonds.  

Frequently Asked Questions (FAQ)

Explain the term maturity date?

The maturity date can be defined as the  due date of a principal amount of a note,  

draft, acceptance bond, or other debt instruments.  On this date, the principal amount is supposed to  

be repaid to the investor. The date is usually  mentioned on top of the financial papers or  

printed on the certificates of the instrument.  On this day only the principal amount is paid,  

while the interests are paid throughout the  life of the debt instrument to the investor.  

The maturity date also represents the  termination date of an installment loan.  

It signifies that the loan must be paid  back in full on the maturity date.

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How can bonds be categorised  based on maturity date?

Bonds can be categorised into three  categories based on maturity date:

Short-term bonds

Short-term bonds are the ones that have a maturity  period of one to five years. These bonds are  

generally issued by entities like investment-grade  corporations, government institutions,  

and companies rated below investment grades.  Short-term bonds are preferred by bondholders  

who want to preserve their funds for a shorter  duration when favourable market conditions.  

In addition, short-term  bonds are easily accessible  

than any other bonds, hence they  are known to be very liquid. 

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Intermediate bonds

Intermediate bonds are neither too short-term  nor too-long term. These types of bonds come  

with a maturity term of about five to ten  years. As a result of an increased period,  

the intermediate bond yields more  money than short-term bonds but  

not more than long-term bonds. Intermediate bonds  are preferred by those investors who have a higher  

level of risk tolerance power. Obviously,  with a longer period, the risk increases,  

and the investment is subjected to face a  lot of ups and downs in the market. 

Long-term bonds

Long-term bonds are usually identified by the  ones that have maturity terms of about 10 to 30  

years. These types of bonds do pay a much higher  yield than any short-term or intermediate bonds.  

Long-term bonds are preferred by investors  who have higher levels of risk tolerance so  

that they can go through several market  fluctuations over the life of the bond.  

Such investors aim to earn a huge  revenue over a long period.

A long-term bond locks an investor with his  investments for a relatively long period.  

However, that can be changed if  there is a call facility or if  

the bond is a convertible  one (convertible bonds). 

How can relationship between maturity date,  coupon rate, and yield to maturity be explained?

Bonds that have a long-term maturity offer  coupon rates to investors similar to the quality  

bonds offered in the case of short-term bonds.  The reason behind offering coupon rates are:

Risk of defaulting loans of the  government or the corporation increases.

Growth of inflation rate with time.