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What Is a Maturity Date?
Let me explain what a maturity date is—it's the date when the principal and interest on a note, draft, acceptance bond, or other debt instrument become due to the creditor. You should know it also marks the termination or due date for an installment loan to be paid back in full. This date ends the relationship between the debtor and creditor or the investor and debt issuer.
You'll find the maturity date on the certificate of the instrument. On that date, the principal investment gets repaid to you as the investor, and any regular interest payments stop.
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 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
Even though investing and borrowing differ, they share elements like the maturity date, which is when the relationship between you as the investor and the issuer, or borrower and creditor, concludes.
Maturity dates set the lifespan of a security or loan, telling you when you'll get your principal back. For example, a two-year certificate of deposit (CD) matures 24 months from issuance, so the issuer repays your principal after that period. A 30-year mortgage matures in three decades, by which time you've repaid the full balance.
These dates also define the period for interest payments. In derivative contracts like futures or options, maturity dates refer to the expiration. Remember, some debt instruments like fixed-income securities are callable, meaning issuers can repay the principal early. Before you buy any fixed-income securities, check if they're callable.
With callable fixed-income securities, the issuer can choose to pay back the principal early, which stops your interest payments prematurely.
Special Considerations
Bonds with longer terms to maturity usually offer higher coupon rates—the annual interest paid to you as the bondholder—compared to similar bonds with shorter terms.
The risk of default by the government or corporation increases over longer periods, and inflation rises too. You need to factor these into the returns you receive as a fixed-income investor.
A bond's price becomes less volatile as it approaches maturity.
Types of Maturity Dates
Maturity dates classify bonds and other securities into three broad categories. Short-term bonds mature in one to three years. Medium-term bonds take 10 or more years to mature. Long-term bonds mature after even longer periods, like a 30-year Treasury bond, which starts paying interest every six months until maturity.
This system applies widely in finance, so bonds, CDs, loans, and mortgages can all be short-term, medium-term, or long-term based on their maturity dates.
Example of a Maturity Date
Consider this hypothetical: Suppose you bought a 30-year Treasury bond in 1996, maturing on May 26, 2016. Using the Consumer Price Index, inflation rose over 218% during that time you held it.
As the bond neared maturity, its yield to maturity—the anticipated return at maturity—and coupon rate converged. Once matured, you received the full principal back, and the investment closed.
How Do You Determine a Bond's Maturity Date?
Look in the bond documents for details, including the final maturity date. You'll typically find it in the Authorization, Authentication, and Delivery section.
How Does the Maturity Date Affect the Interest Rate of a Bond?
Bonds with longer terms offer higher interest rates, but this comes with additional risks for you as the investor.
What Happens If a Company Defaults on Its Bonds?
If a company goes bankrupt and defaults, you as a bondholder have a claim on its assets. The type of bond—secured or unsecured—determines your claim's priority, and there will be other creditors involved.
The Bottom Line
The maturity date of a bond or debt instrument is when the principal gets repaid to you, and interest payments stop. Conservative investors like the clear timeline for principal repayment. For loans, it means when you must pay back the full amount.
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