how maturity dates work
although investing and borrowing may be different there are some commonalities between these two ventures one of these is what s called a maturity date which is the date at which the relationship between the investor and issuer and the borrower and creditor ends a maturity date defines the lifespan of a security or loan informing investors and creditors when they receive their principal back for instance the maturity date also defines the period of time in which investors receive interest payments for derivative contracts such as futures or options the term maturity date is sometimes used to refer to the contract s expiration date it is important to note that some debt instruments such as fixed income securities are often callable for callable securities including callable bonds issuers maintain the right to pay back the principal before its maturity date 1 before buying any fixed income securities investors should determine whether the bonds are callable or not with callable fixed income securities the debt issuer can elect to pay back the principal early which can prematurely halt interest payments made to investors special considerationsbonds with longer terms to maturity tend to offer higher coupon rates the annual amount of interest paid to the bondholder than similar quality bonds with shorter terms to maturity the risk of the government or a corporation defaulting on the loan increases over longer periods of time additionally the inflation rate grows higher over time these factors must be incorporated into the rates of return fixed income investors receive a bond s price grows less volatile the closer it comes to maturity types of maturity datesmaturity dates are used to classify bonds and other types of securities into one of the following three broad categories 2this classification system is used widely across the finance industry this means that the maturity dates of bonds cds and debts like loans and mortgages can all be either short term medium term or long term example of a maturity datehere s a hypothetical example to show how maturity dates work let s say an investor bought a 30 year treasury bond in 1996 with a maturity date of may 26 2016 using the consumer price index cpi as the metric the hypothetical investor experienced an increase in u s prices or rate of inflation of over 218 during the time he held the security as a bond grows closer to its maturity date its yield to maturity ytm which is the anticipated return on the bond at maturity and coupon rate begin to converge once the bond matures the investor receives the full principal balance back and the investment is considered closed 