What is a due date? | Financial literacy

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Your mortgage is due; receive $ 150. “If you’ve played Monopoly before, you know this Chance card and probably happy to draw it yourself! But did you know there is a real-world implication for maturity? the maturity date when they invest.This is the date on which the bond contract ends, on which date the borrower or issuer must pay the bondholder the face value of the bond. In short: it’s payday, and you can expect a Monopoly-like experience.

The maturity date is not only the day the bond materializes, it also plays an important role in everything from the coupon rate at issue to how the bond will perform in secondary markets. Here’s what you need to know.

Due dates vary by product

The maturity of a loan or investment product varies. Not all bonds have the same maturity. Likewise, homeowners usually have the option of choosing between a 15 to 30 year mortgage. It all depends on your time horizon and the conditions attached to the different product deadlines. Regardless of the product, however, it all boils down to three classifications:

  • Short term. These products have a maturity of between one and three years, on average.
  • Middle term. Financial products with 10 years or more to their maturity date.
  • Long term. Long-term products with maturities of up to 30 years.

There are all kinds of debt products that fall into these categories. For example, a two-year certificate of deposit (CD) has a short-term maturity date, as opposed to the 30-year long-term maturity date of a mortgage. Maturity and coupon or interest rates generally coincide with each other. The longer the duration, the higher the rate (usually). Consider treasuries, for example:

  • Goods of treasure. Zero coupon bonds that mature in one year or less.
  • Treasury Notes. Maturities of 2, 3, 5, 7 or 10 years, with payment of coupons at 6 months.
  • Treasury bonds. Long-term maturity of 30 years, with coupon payment at 6 months.
  • Inflation Protected Treasury Securities (TIPS). Maturities at 5, 10 or 30 years.

Depending on their time horizon and their investment thesis, debt investors must balance the maturities of these products with their coupon rates.

Investment vs borrowing and maturity date

There is a big distinction between due dates depending on whether you are an investor or a borrower. Regardless of the side of the coin, you can determine the optimum maturity of the product, as well as the rates and terms attached to it.

For example, if you are a retiree investor looking for passive income and a safe place to park your money, a five-year treasury bill and its six-month coupon payments is a smart investment. If you are a borrower about to finance an investment property, you can opt for a 30-year fixed mortgage at a slightly higher rate than a 15-year mortgage, simply because the monthly payment is lower.

Investors and borrowers will also notice different maturity rates attached to different types of products. Typically, borrowers will see longer repayment terms, while investors will have access to a full range of short, medium and long term maturities.

Examples of due dates

To better understand maturity dates and what they mean, it’s worth looking at both sides of the coin: borrowing versus investing.

  • Loan. You take out a 30-year mortgage for $ 250,000 at a fixed rate of 3.4%. You will make monthly payments comprising both accrued interest and remaining principal for the next 30 years, until the balance reaches zero on the due date.
  • Invest. You invest in a $ 5,000 corporate bond with a coupon rate of 6% and a three-year maturity. You’ll receive 6% every six months for as long as you own the bond, and then buy it back for its face value when it matures.

In both cases, the expiry date limits the holding period. As a borrower, you will pay off your debt within this time frame. As an investor, you will capitalize on the return on your investment during this period. The due date marks the end point.

What are callable bonds?

Some bonds are “redeemable”. They have a maturity date like any other debt instrument; However, the issuer can choose to redeem the bond before that date if they wish. This can be a good thing, as it ensures that the investor gets their money back before they expect it. In other respects, it is a bad thing, for example if the bond had a high coupon rate.

Issuers generally call bonds when interest rates fall. This allows them to pay off the principal balance of the outstanding bonds (call them) and then reissue the bonds at a rate more favorable to the issuer (lower coupon). Callable bonds tend to have a slightly higher interest rate to make them more attractive to investors, who may not see the full amount of interest paid if the bond is redeemed before its maturity date.

The end of a contractual obligation

Depending on the type of debt security you are investing in, the maturity date may seem far away. Conversely, if you have a bond that is coming due, you are about to make money. The amount of money depends on the yield to maturity and the type of product you have invested in. Investors willing to wait a decade or more for a bond’s maturity date to arise will end up with a return that is worth the wait.

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