Maturity (Bond Maturity)

Maturity (bond maturity) is the date on which a bond, note or other debt security comes to an end and the issuer must repay its face value, also called principal or par, along with the last interest payment. The term also describes the time left until that date, so a bond issued today that ends in ten years has a ten-year maturity. Governments, companies, banks and municipalities set a maturity on every fixed-term bond they sell.

Maturity is one of the main features investors compare, alongside coupon, price and credit quality, because it shapes how much a bond's price moves when interest rates change. It should not be confused with maturity transformation, which is what banks do when they fund long-term loans with short-term deposits. Bond maturity is a fixed feature of one security; maturity transformation is a balance-sheet activity that mixes many maturities.

Think of a bond as a loan with a return date written on the contract. When you lend a friend money until next spring, spring is the maturity: that is when the money comes back. Until then, the borrower pays you a small fee at regular intervals, and on the final day they hand back the full amount they borrowed.

A loan that comes back next month carries little uncertainty, because not much can change in a month. A loan that comes back in thirty years is different: prices, the borrower's fortunes and the rates others offer may all shift in the meantime. That is why lenders usually ask for a higher rate on longer loans, and why the return date is printed on every bond.

Markets group debt by how far away the maturity is. The bands are conventions rather than legal definitions, and they vary between markets and data providers:

• Short term. Debt that matures within about a year, such as US Treasury bills, commercial paper and many certificates of deposit, trades in the money markets.
• Medium term. Securities maturing in roughly two to ten years, including US Treasury notes, are often called intermediate-term debt.
• Long term. Bonds maturing in more than ten years, such as 20- and 30-year Treasury bonds, sit at the long end. A few issuers go further: Austria sold a 100-year government bond in 2017.

Some bonds have no maturity at all. These perpetual bonds pay interest indefinitely; the United Kingdom repaid the last of its historic consols, some dating back to the 18th century, in 2015.

The longer the time to maturity, the more a bond's market price usually rises or falls when rates move, because more future payments are discounted at the new rate. A one-year bill barely moves when rates rise by one percentage point; a 30-year bond can lose a large share of its value. Investors who hold to maturity and are repaid in full avoid that price loss, but they carry the risk that the issuer defaults first, as in a sovereign default. Lenders also usually ask for extra return, the term premium, for tying money up longer. Plotting the yields of one issuer's bonds against their maturities produces the yield curve, which in most periods slopes upward.

The yield an investor earns if a bond is bought at today's price, every payment is made on time and the bond is held to maturity is the yield to maturity (YTM). It is the rate that makes the present value of all payments equal the price, and it is usually solved by trial or software. A common approximation is:

• $C$ is the annual coupon payment in money terms.
• $F$ is the face value repaid at maturity.
• $P$ is the price paid for the bond today.
• $n$ is the number of years to maturity.

Take a bond with a face value of $1,000, an annual coupon of $50 and ten years to maturity, bought for $950. The yearly gain from price to face is $(1{,}000 - 950) \div 10 = 5$. The average of face and price is $(1{,}000 + 950) \div 2 = 975$. The approximate yield is $(50 + 5) \div 975 \approx 5.64\%$, above the 5% coupon because the bond was bought below par. An exact calculation gives a slightly different figure; the approximation is close for bonds priced near par.

The stated maturity is not always the date the money comes back. A callable bond lets the issuer repay early, usually from a set call date and sometimes at a small premium over par. Issuers tend to call when rates have fallen, so they can refinance more cheaply, which leaves investors reinvesting at lower rates. For that reason analysts also quote yield to call and yield to worst, the lowest yield across all possible redemption dates. A putable bond gives the holder the opposite right, to sell the bond back early. Sinking-fund bonds retire part of the issue each year, and some structured and convertible bonds can end early if they are converted into shares. At the very short end, a repurchase agreement can mature overnight, a reminder that maturity ranges from a single day to a century.

• US Securities and Exchange Commission (Investor.gov): Bonds
• TreasuryDirect: Marketable Securities