“Your building loan matures; receive $150.” If you’ve ever played Monopoly, you’re familiar with this Chance card—and likely happy to draw it on your turn! But did you know that there’s a real-world implication for maturity? Bond investors need to pay attention to the maturity date when investing. This is the date on which the bond contract ends. On that 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 similar experience to the Monopoly card.
Maturity date isn’t just the day the bond comes to fruition—it also plays a big role in everything from the bond’s coupon rate at issuance, to how the bond will fare in secondary markets. Here’s what you need to know.
Maturity Dates Vary Across Products
The maturity of a loan or investment product varies. Not all bonds have the same maturity date. Similarly, homeowners usually have the option to choose between a 15- and 30-year mortgage. It all comes down to your time horizon and the terms attached to different product maturities. Regardless of the product, however, it all boils down to three classifications:
- Short-term. These products have maturity between one and three years, on average.
- Medium-term. Financial products with 10 years or more until their maturity date.
- Long-term. Long-term products with maturity dates as far out as 30 years.
There’s all manner 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 on a mortgage. Maturity and coupon or interest rates typically coincide with each other, as well. The longer the term, the higher the rate (generally). Consider treasuries, for example:
- Treasury bills. Zero-coupon bonds that mature in one year or less.
- Treasury notes. Maturities of 2, 3, 5, 7 or 10 years, with 6-month coupon payments.
- Treasury bonds. Long-term maturity of 30 years, with 6-month coupon payments.
- Treasury Inflation Protected Securities (TIPS). Maturities of 5-, 10- or 30-years.
Depending on their investment time horizon and thesis, debt investors need to balance the maturity dates of these products alongside their coupon rates.
Investment vs. Borrowing and Maturity Date
There’s a big distinction among maturity dates depending on whether you’re an investor or a borrower. Whatever side of the coin you’re on can determine the optimal maturity for the product, as well as the rates and terms attached to it.
For example, if you’re a retired investor looking for passive income and a safe place to park your money, a five-year treasury note and its six-month coupon payments is a smart investment. If you’re a borrower getting ready to fund an investment property, you might opt for a 30-year fixed mortgage at a slightly higher rate than a 15-year, 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 timelines for repayment, while investors have access to a full gamut of short-, medium- and long-term maturities.
Examples of Maturity Dates
To get a better understanding of maturity dates and what they mean, it’s worth looking at both sides of the coin: borrowing vs. investing.
- Borrowing. You take out a 30-year mortgage for $250,000 at a fixed rate of 3.4%. You’ll make monthly payments that include both accrued interest and remaining principal for the next 30 years, until the balance reaches zero at the maturity date.
- Investing. You invest in a $5,000 corporate bond with a coupon rate of 6% and a maturity of three years. You’ll collect 6% every six months for as long as you hold the bond, then redeem it for the face value when it reaches maturity.
In both cases, the maturity date caps the period of ownership. As a borrower, you’ll repay your debt within that time. As an investor, you’ll capitalize on ROI within that time period. The maturity date signals the end point.
What are Callable Bonds?
Some bonds are “callable.” They feature a maturity date just like any other debt security; however, the issuer can choose to redeem the bond before that date if they so choose. This can be a good thing, because it ensures the investor gets their money back before they anticipated. In other ways, it’s a bad thing—such as if the bond had a high coupon rate.
Issuers typically call bonds when interest rates fall. This allows them to repay the principal balance on outstanding bonds (call them), then re-issue the bonds at a more favorable rate 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 interest amount paid out if the bond is called before it’s maturity date.
The End of a Contractual Obligation
Depending on the type of debt instrument you’re investing in, the maturity date can seem like it’s a far way off into the future. Conversely, if you’re holding a bond that’s reaching maturity, you’re about to come into some money. How much money depends on the yield to maturity and the type of product you’ve invested in. Investors willing to wait a decade or more for a bond’s maturity date to come around will find themselves with a return worth waiting for.
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