Bond maturity meaning
What is bond maturity?
Bonds are used by governments and companies to raise money from investors – all on the basis that the funds they borrow will be paid back in full later. This date is known as the time when the bond reaches maturity.
Whether a bond has a maturity date that’s quite short-term – or many years in the future – often depends on who is issuing them, and what the bond is for. Some corporate bonds may only last for a year or two because the business only needs a temporary cash boost. Others, such as Treasury bonds issued by the US government, have a maturity date that’s 10 or even 30 years down the line.
A fun fact: 100-year bonds even exist – and they have previously been issued by the likes of Coca-Cola, the Walt Disney Company, and the Argentinian government. Although its highly unlikely that many lenders would like long enough to see their investment mature, at least they can take comfort in the fact that they will receive annual interest payments – and that they can sell them on to a younger investor.
What’s the difference between maturity and duration?
Rather confusingly, there are two terms associated with bonds that sound exceedingly similar. While maturity refers to when a bond expires (and hence, how long it is in place for,) duration is used to measure how its price could change if interest rates rise or fall.
Duration helps investors make sure they are getting a good deal, especially when it comes to longer-term bonds. If interest rates rise (making the returns on a bond less attractive,) this will usually mean that they can be purchased for less than face value. If rates fall (meaning that the coupon rate attached to a bond is better than what’s on offer from the current market,) bonds can end up costing more.