What Is Maturity?

Maturity is the date on which the life of a transaction or financial instrument ends, after
which it must either be renewed or it will cease to exist. The term is commonly used for
deposits, foreign exchange spot trades, forward transactions, interest rate and
commodity swaps, options, loans, and fixed income instruments such as bonds.

Maturity of Bonds

At the maturity of a fixed-income investment such as a bond, the borrower is required

to repay the full amount of the outstanding principal plus any applicable interest to the
lender. Nonpayment at maturity may constitute default, which would negatively affect
the issuer's credit rating.

Term to maturity refers to the amount of time during which the bond owner will receive
interest payments on their investment. Bonds with a longer term to maturity will
generally offer a higher interest rate. Once the bond reaches maturity, the bond owner
will receive the face value (also referred to as "par value") of the bond from the issuer
and interest payments will cease.

Maturity date

Maturity date refers to when the issuer must repay the principal at face value
and remaining interest. The maturity date determines the term that
categorizes debt securities.

3 terms of maturity

Debt is typically categorized into terms to maturity. There are three terms of

debt: short-term, long-term, and medium-term debt.

A short-term debt security is one that matures within a short period of time,

typically within a year. An example of short-term debt is a Treasury bill, or T-
bill, issued by the U.S. Treasury with terms of four weeks, 13 weeks, 26 weeks,
and 52 weeks.

Long-term debt refers to fixed income securities set to mature more than 10

years from the issue or purchase date. Examples of long-term debt include the
20-year and 30-year Treasury bonds. Long-term debt is more sensitive to
interest rate changes than short-term debt given that there is a greater
probability of interest rates rising within a longer time period than within a
shorter time frame.

Intermediate or medium-term debt is classified as debt that is due to mature

in two to 10 years. Typically, the interest on these debt securities is greater
than that of short-term debt of similar quality but less than that on
comparably rated long-term bonds. The interest rate risk on medium-term
debt is higher than that of short-term debt instruments but lower than the
interest rate risk on long-term bonds.

Firms often choose a maturity in which the outflow obligations are in line with
their expected inflows.

Why maturity of a bond is important?

The maturity of a bond is important when considering interest rate risk.

Interest rate risk is the amount a bond's price will rise or fall with a decrease or
increase in interest rates. If a bond has a longer maturity, it also has a greater
interest rate risk.

The maturities of bonds and preferred stocks are very important. Not only do
they tell investors when they will be repaid, they are crucial to
mathematically determining the appropriate price of the security
Unlike equities, ownership of corporate bonds does not signify an ownership
interest in the company that has issued the bond. Instead, the company pays
the investor a rate of interest over a period of time and repays the principal at
the maturity date established at the time of the bond’s issue.