When people speak about maturity in a financial sense, they are referring to the lifespan of a financial instrument. The maturity date is the day a payment becomes due for a debt instrument. The borrower at that time must pay the principal amount of a loan with interest to the lender or investor.
Maturity is most commonly used with loans and fixed income investment instruments such as bonds and certificates of deposit (CDs). At maturity, the principal amount of a financial agreement plus interest is paid.
Definition and Example of Maturity and Maturity Value
When the maturity date arrives and principal and interest have been paid, it marks the end of a contractual agreement. Maturity value is the amount an investor will receive in total at the end of a debt instrument’s holding period. It can be expressed as:
MV = Principal + (Principal x Interest Rate x Years to Maturity)
For example, if a company issues a $10,000 bond that pays a 3% annual coupon and the bond matures in five years, the bondholder will receive $300 each year, or $1,500 over the life of the bond. The principal amount of $10,000 will be returned at the end of five years.
Maturity Value = $10,000 + ($10,000 x 0.03 x 5) or $11,500
The bond has a maturity value of $11,500. The original principal of $10,000 is known as the par value.
From a borrower’s perspective, it is wise to understand the maturity value of a loan, or the total amount of money due by the maturity date.
For consumer borrowers, the maturity value formula remains the same as for a debt instrument.
If someone purchased $5,000 worth of furniture on credit at 4% interest and the loan had to be repaid in three years, the maturity value would be $5,600.
$5,000 + ($5,000 x 0.04 x 3) = $5,600.
Types of Maturity
Maturity generally refers to the date that a financial agreement comes due. Here are some examples of when financial maturity comes into play.
An investor deposits an amount of money (a minimum amount may be set) with the agreement to leave it deposited for a fixed amount of time. The agreement stipulates how much interest will be paid and how often.
The date the investor can recover the principal is the maturity date. A common example of this is a CD. Typically, the longer the investment period is, the higher the interest rate will be. There may be a penalty for withdrawing the money prior to the maturity date.
This represents the time remaining on a bond’s life. The date the principal is required to be paid out, along with any outstanding interest payments.
Not all bonds are held until maturity. Callable bonds allow the issuer to retire a bond before the maturity date. The issuer pays the par value and any interest accrued to date. Sometimes a call premium is also paid.
Structured Note Maturity
Structured notes are securities issued by financial institutions with a fixed maturity whose value is derived from one or more underlying assets, and the return is linked to the performance of those assets. Structured notes are usually illiquid, so an investor should expect to hold on to the note until maturity.
Why Maturity Matters to Investors
It is important for an investor to make sure that any investment vehicle that has a maturity date matches their investment timeline. An investment with a short maturity probably will not serve an investor well if they are seeking long-term growth. Fixed income investments with short maturities typically have lower returns.
Conversely, it is unwise to commit money to an investment with a distant maturity date if there is a chance you will need the principal before the maturity date, as penalties for early withdrawal may apply.
- Maturity is a date on which a financial agreement ends, triggering the payment of principal with interest or repayment of a loan with interest.
- Maturity commonly applies to fixed-income investments such as bonds or CDs, as well as loans.
- If an individual invests in a security with a maturity date and removes the principal prior to that date, a penalty may apply.
- A borrower can usually pay off a loan prior to the maturity date without a penalty and save on interest payments by doing so.
- The maturity value of a loan is the total cost of a loan, including principal and interest paid over the lifetime of the loan.