The date of maturity is the date at which the principle amount due on any note draft acceptance bond or another loan instrument is due. This date is usually found on the certification of the particular instrument the principal investment will be returned to the investor and the interest payments, which are regularly distributed throughout the duration of the bond stop rolling in. The date of maturity is also a reference to the end of the date (due date) when an installment loan has to be returned in full.
Breaking Down Date for Maturity
The maturity date is the life span of an investment, and informs investors when they can expect to get their principal back. A 30-year mortgage therefore will mature three years after the date it was granted, while two-year Certificate of Deposit (CD) will have its date of maturity twenty-four months from the time it was created.
The date of maturity also defines the time frame in the period during which investors are entitled to interest payments. It is crucial to be aware that some debt instruments, like Fixed-income bonds are “callable,” in which the issuer has the right to repay the principal at anytime. Therefore, investors must inquire prior to purchasing any fixed-income securities regarding whether the bonds can be called or not.
In the case of derivative contracts, such as options or futures the term “maturity date” is often used to be a reference to the contracts expiration date..
Dates of maturity are used to classify bonds and other kinds in securities to one or more of three categories:
- Short-term: Bonds that mature within one to three years.
- Medium-term: Bonds due within 10 or more years.
- Long-term. The bonds mature over longer durations However, a typical instrument of this kind is the thirty-year Treasury bond. When it is issued the bond starts to extend the interest rate, usually every six months until the 30 year loan is finally repaid.
Its classification system is extensively used in the financial industry and attracts cautious investors that appreciate the transparent timetable, which outlines when their principal is due to be returned.
The Relationships between Maturity Date and Coupon Rate in addition to Yield at Maturity
Bonds that have longer maturities generally have more attractive coupon rates than comparable bond types with shorter maturities. There are many reasons for this phenomenon. In the first place, the possibility of a company or the government going into default on loan is increased the more far into the future you anticipate. In addition, the rate of inflation will likely to increase, as time. These variables must be included into the returns Fixed income investors get.
For illustration, think of an example of an investor who purchased the bond in 1996 30 years of Treasury bond, which had an expiration date of May 26 the 26th of May, 2016. If we use an index called the Consumer Price Index (CPI) as the metric for the bond, the hypothetical investor was able to see the rise of U.S. prices, or rate of inflation that was greater than 218% over the period he owned the bond. This is an excellent illustration of how inflation grows as time passes. In addition when bonds get closer to its expiration date it’s rate of yield (YTM) and the rate of coupon begin to increase, due to the fact that the bond’s value becomes less volatile the closer it is to its maturation.