Bonds have been a favorite investment option for many people since their inception. But very few know how it works. A bond is an investment instrument that pays fixed income, which essentially represents a loan made by an investor to a borrower. Bonds are typically issued by corporations, municipalities, states, and sovereign governments to fund projects and operations. Bondholders are the debtors, or creditors, of the issuer.
A bond can also be considered as a debt security granted by the investor to the borrower. It includes all relevant details of the loan and its payments such as maturity date, interest rate, any other variable or fixed interest payment terms to be made by the borrower and any terms regarding withdrawal anticipated. In the context of financial instruments, maturity is the state of payment due. However, to learn more about a bond’s maturity date, read on.
What is the maturity date of a bond?
Maturity date refers to the date on which the principal amount of an investment, such as a bond, note or other debt instrument, becomes due and is repaid to the investor. Such a maturity date is generally printed on the certificate of the investment instrument in question and is fixed when it is issued.
On a bond’s maturity date, the principal investment is returned to the investor, while the regular interest payments that have been made during the term of the bond cease to roll. Investors can redeem accrued interest and principal without penalty. The due date can also be simply referred to as the termination date (due date) by which a loan must be repaid in full.
Break down due date
The maturity date establishes the life of a security or investment instrument. It informs investors when they will receive their invested capital. For example, a 30-year mortgage has a maturity date of three decades from the date of issue and a 2-year bond has a maturity date of twenty-four months from when it was first issued.
The maturity date also defines the period during which investors will receive interest payments. However, it should be noted that certain debt securities, such as fixed income securities (an investment instrument that provides a return in the form of fixed periodic interest payments), may be “callable”. In this case, the debt issuer retains the right to repay the principal at any time. Thus, investors should find out before buying fixed income securities, whether the bonds are callable or not. For instruments such as derivative contracts (futures or options), the expiry date is used interchangeably with the expiry date of the contract.
Time to maturity of a bond
Time to maturity is defined as the remaining life of a bond as a debt instrument. The term can range from when the bond is issued until its maturity date when the issuer is expected to redeem the bond and pay its face value to the bondholder.
Ranking of maturities
Maturity dates are used to classify bonds and other types of securities into one of three broad categories. Generally, a bond that matures within one to three years is called a short-term bond. Medium or mid-term bonds are colloquially those that mature in four to 10 years, and long-term bonds are those with a duration of more than 10 years. A common long-term instrument is a 30-year treasury bill. When the bond is issued, it begins extending interest payments, usually every six months, until the 30-year loan matures.
Investors can choose between short term bonds, medium to medium term bonds and long term bonds when looking for fixed income instruments. Their investment choice is influenced by factors such as their risk tolerance, time frame and goals. Generally, short-term bonds are low risk and low return. These are preferred by investors with a low appetite for risk and a sense of security with their investments. This means that they are willing to forgo the higher yields offered by medium- to long-term bonds for greater stability and lower risk.
On the other hand, long-term bonds offer higher returns, but they carry higher risk. Long-term bonds freeze or lock in an investor’s funds for a longer period, giving interest rates more time to influence the price of the bond. Investors with a higher risk tolerance would happily park their money for long periods of time, in exchange for a higher return. However, long-term bonds are more volatile than other types of bonds. This means they may not be suitable for investors looking to recoup their investment within three years.
This particular classification system is widely used in the financial industry. It appeals to conservative investors who appreciate the clear timeline of when their principal will be repaid.
With investing, it is extremely important to know what you are signing up for. Bonds are safe investment instruments that can be explored. However, it is important to do thorough personal research and analysis before investing your hard-earned cash.