Definition
The maturity date is the date on which a financial obligation becomes due for payment. It is when the principal amount of a bond, bill of exchange, insurance policy, or other debt instrument must be repaid to investors or beneficiaries. The maturity date signals the end of the investment period and can also be referred to as the redemption date, particularly in the context of redeemable government stocks.
Key Points:
- The maturity date marks the end of an investment’s term.
- Upon reaching maturity, the issuer must repay the principal amount owed.
- Investments can be in the form of bonds, bills of exchange, or insurance policies.
- Early redemption before maturity might incur penalties or altered terms.
Examples
Bonds
- Corporate Bond: A company issues a 10-year bond with a maturity date set for December 31, 2030. On this date, the company must repay the bondholders the principal amount of the bond.
- Government Bond: A government issues a 5-year Treasury note that matures on June 30, 2025. The government will repay the face value of the note to holders on this date.
Bills of Exchange
- Commercial Paper: A corporation issues a short-term commercial paper with a maturity of 90 days. If issued on January 1, the maturity date is April 1, when the holder must be paid.
Insurance Policies
- Endowment Policy: A life insurance policy that has a maturity date coinciding with the policyholder’s 65th birthday, at which point the insured sum is payable.
Frequently Asked Questions (FAQs)
What happens on the maturity date of a bond?
On the maturity date of a bond, the issuer is required to pay back the principal (face value) of the bond to the bondholders. Any final interest payments due are also made at this time.
Can the maturity date of a financial instrument be changed?
Typically, the maturity date is fixed and cannot be altered. Certain instruments, however, may have provisions for early redemption or extension of their terms under specified conditions.
How does the maturity date affect the interest rate of a bond?
Typically, the maturity date affects the interest rate, with longer-term bonds usually offering higher rates to compensate for the additional risk over time.
How is the maturity date relevant to investors?
The maturity date is crucial for investors as it determines the timeframe for repayment. The closer a bond is to its maturity date, the less volatile it typically becomes, as repayment is imminent.
What is an early redemption?
Early redemption is when an issuer pays off a debt instrument before its maturity date. This may involve additional costs or adjusted terms, depending on the instrument.
Is there any risk associated with the maturity date?
Risks involve issuer default close to or on the maturity date. Other risks include interest rate changes that may affect the reinvestment of the principal amount repaid.
Can an insurance policyholder receive payments before the maturity date?
It depends on the policy terms. Some life insurance policies allow loans against the policy’s value or partial surrenders before maturity.
How does inflation affect a bond’s maturity value?
Inflation can erode the purchasing power of the principal repaid at maturity, especially for fixed-rate bonds that do not adjust for inflation.
What is ‘refinancing on maturity’?
Refinancing on maturity occurs when an issuer replaces an old debt with a new debt instrument upon or around the maturity date of the original debt.
What are callable bonds in relation to maturity dates?
Callable bonds can be redeemed by the issuer before their maturity date at a predetermined price, making them subject to early redemption risk for investors.
Related Terms
Bond
A fixed income instrument representing a loan made by an investor to a borrower (typically corporate or governmental).
Redemption Date
The specified date at which a bond or stock can be called or redeemed before its maturity date.
Bill of Exchange
A written order by the drawer to the drawee to pay a certain sum to a specified person or the bearer of the instrument at a future date.
Insurance Policy
A contract in which an individual or entity receives financial protection or reimbursement against losses from an insurance company.
Online References
Suggested Books for Further Studies
- “Investing in Bonds For Dummies” by Russell Wild
- “Fabozzi on Financial Modeling” by Frank J. Fabozzi
- “The Handbook of Fixed Income Securities” by Frank J. Fabozzi
Accounting Basics: “Maturity Date” Fundamentals Quiz
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