What Is a Maturity Date?
A maturity date is the date on which the principal amount of a note, draft, acceptance bond, or other debt instrument becomes due. It also refers to the termination or due date on which an installment loan must be paid back in full. As such, the relationship between the debtor and creditor or the investor and debt issuer ends. The maturity date can be found on the certificate of the instrument. The principal investment is repaid to the investor on the maturity date and regular interest payments made to them cease on this date.
Key Takeaways
- The principal of a fixed-income instrument must be repaid to an investor when the instrument reaches its maturity date.
- The maturity date also 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, medium-term, and long-term.
- Once the maturity date is reached, the debt agreement no longer exists and any interest payments regularly paid to investors cease.
- Issuers of callable securities may pay off the principal balance before the maturity date.
How Maturity Dates Work
Although investing and borrowing may be different, there are some commonalities between these two ventures. One of these is what's called a maturity date which is the date at which the relationship between the investor and issuer, and the borrower and creditor ends.
A maturity date defines the lifespan of a security or loan, informing investors and creditors when they receive their principal back. For instance:
- A two-year certificate of deposit (CD) has a maturity date of 24 months from when it was established, which means that the issuer repays the principal balance to the investor.
- A 30-year mortgage has a maturity date of three decades from when it was issued, by which point the borrower has repaid the balance in full.
The maturity date also defines the period of time in which investors receive interest payments. For derivative contracts such as futures or options, the term maturity date is sometimes used to refer to the contract's expiration date.
It is important to note that some debt instruments, such as fixed-income securities, are often callable. For callable securities, including callable bonds, issuers maintain the right to pay back the principal before its maturity date. Before buying any fixed-income securities, investors should determine whether the bonds are callable or not.
With callable fixed income securities, the debt issuer can elect to pay back the principal early, which can prematurely halt interest payments made to investors.
Special Considerations
Bonds with longer terms to maturity tend to offer higher coupon rates (the annual amount of interest paid to the bondholder) than similar-quality bonds with shorter terms to maturity.
The risk of the government or a corporation defaulting on the loan increases over longer periods of time. Additionally, the inflation rate grows higher over time. These factors must be incorporated into the rates of return fixed-income investors receive.
A bond's price grows less volatile the closer it comes to maturity.
Types of Maturity Dates
Maturity dates are used to classify bonds and other types of securities into one of the following three broad categories:
- Short-Term: These are bonds that mature in one to three years
- Medium-Term: With these bonds, maturity takes place in 10 or more years
- Long-Term: These bonds mature after longer periods of time. 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-year bond matures.
This classification system is used widely across the finance industry. This means that the maturity dates of bonds, CDs, and debts (like loans and mortgages) can all be either short-term, medium-term, or long-term.
Example of a Maturity Date
Here's a hypothetical example to show how maturity dates work. Let's say an investor bought a 30-year Treasury bond in 1996 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.
As a bond grows closer to its maturity date, its yield to maturity (YTM), which is the anticipated return on the bond at maturity, and coupon rate begin to converge. Once the bond matures, the investor receives the full principal balance back and the investment is considered closed.
How Do You Determine a Bond's Maturity Date?
The bond documents will include a lot of information, including the final maturity date. Typically, investors can find the final maturity date in the Authorization, Authentication, and Delivery section of the bond documents.
How Does the Maturity Date Affect the Interest Rate of a Bond?
Bonds with longer terms tend to offer higher interest rates. This higher interest rate goes hand in hand with additional risks for investors.
What Happens If a Company Defaults on Its Bonds?
If a company goes bankrupt and defaults on its bonds, bondholders have a claim on that company's assets. But the type of bond, whether that's secured or unsecured, will determine the priority of a bondholder's claim. A company going through bankruptcy will also have other creditors. Ultimately, claims on the company's assets will be sifted through in bankruptcy court.
The Bottom Line
The maturity date of a bond or other debt instrument determines when the principal investment is repaid to investors. At this point, interest payments made to investors stop. Conservative investors may appreciate the clear time table outlining when their principal will be paid back. When used in the context of loans, a maturity date refers to the time when the borrower must pay back a loan in full.
