• Maturity date defines the period during which interest payments will be made on any financial instrument to which the concept can be applied.
• The term is generally used in reference to loans, certificates of deposit, bonds, and notes.
• Payments to lenders and investors stop on the maturity date and agreements are retired
Simply put, maturity date dictates the lifespan of a security. For example, a 15-year mortgage has a maturity date of a decade and a half from the day it was issued. The maturity date of a five-year certificate of deposit is 60 months from the date of its issue. In other words, it tells investors and lenders when the entirety of their investment amount will be completed.
The maturity date also defines the period within which an investor can expect to receive interest payments on an investment. However, an exception should be noted here. Some investments are “callable,” in that the issuer has the right to repay the principal amount at any time, in which case interest payments would cease on the date full repayment is made. This is important for people who are investing in fixed-income assets, looking for long-term income. A callable instrument could truncate the period of anticipated interest payments.
The date by which a loan is expected to be paid in full, a loan’s maturity date is when the entirety of the loan amount, as well as associated interest payments, should be made. Payments left outstanding as of the loan’s maturity date could be cause for the lender to declare the loan to be in default. Therefore, it is prudent for a borrower to be acutely aware of the maturity date of a loan to ensure they are compliant with the agreement.
As an example, a five-year car loan, issued on August 19, 2022, would have a maturity date of August 19, 2027, which is when the final payment would come due.
The maturity date of a loan also plays a key role in its amortization, when it comes to determining the total amount of interest the loan will earn. In some cases, lenders have the right to impose fees if a loan is paid off before it amortizes fully, to profit as much as possible from the investment. These fees are typically referred to as prepayment penalties.
It is incumbent upon borrowers to ensure the loan agreement waives prepayment penalties if their goal is to pay the loan off as quickly as possible.
The date when an investor is slated to recoup the funds invested in bonds, notes, or certificates of deposit (CDs) is the maturity date of that investment.
Maturity Dates and CDs – date the depositor will get the initial deposit back, along with the interest it earned, is the maturity date of that CD. For example, a $30,000 deposit in a two-year CD at an annual percentage yield of .90% would return a total of $30,542.42, for a profit of $542.42 in interest.
Upon maturity of the certificate, the investor can usually choose to take their profit, or allow the principal and proceeds to be rolled into another term. Depending upon the nature of the agreement, this sometimes happens automatically if the depositor takes no action within a certain number of days of the maturity date.
However, withdrawing the money before the maturity date could subject the depositor to early withdrawal fees.
Private Market Investing 101, with Kal Penn
Maturity Dates and Bonds – The face (or par) value of a bond is returned to the investor when a bond matures. However, unlike CDs, interest payments may be made at certain intervals over the lifetime of the bond, as opposed to when it matures. This typically happens on a biannual basis, which can make certain types of bonds a good source of passive income.
When used in reference to bonds, the maturity date also determines whether the asset is considered short-term (one to three years), medium-term (10+ years) or long term (30 years). For example, a US Treasury bond can require up to 30 years to mature. Meanwhile, a US Treasury note can have a maturity date of 10 years or less.
Generally, the longer a bond’s term, the greater its yield. After all, the more time that passes between the time of the investment and the maturity date, the greater the odds the issuer might experience some sort of a setback that could cause them to default. In other words, the greater the risk, the greater the potential reward.
Moreover, inflation tends to devalue money over time. For such an opportunity to make sense, an investor should seek compensation with the future value of money in mind.
Depending upon an investor’s overall goals and time horizon, including fixed income assets such as bonds, CDs and notes can provide a degree of diversification to an investment portfolio. This is important when it comes to ensuring a portfolio has the potential withstand instances of unfavorable volatility in publicly traded stocks. Along with fixed-income investments comes the need to be aware of maturity dates to decide whether to allow an investment to roll over or shift the funds into a different asset.
Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings. Real estate, private equity, venture capital, digital assets, and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification.
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Ultimately, the maturity date is the point in time at which a borrower or an issuer has agreed to convey final payment to the lender or investor. Once the maturity date is reached (assuming all payments were made as scheduled), the agreement between the parties ceases to exist.
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