What Is Term to Maturity?
A bond's term to maturity is the length of time during which the owner will receive interest payments on the investment. When the bond reaches maturity the principal is repaid.
Key Takeaways
- A bond's term to maturity is the period during which its owner will receive interest payments on the investment.
- When the bond reaches maturity, the owner is repaid its par, or face, value.
- The term to maturity can change if the bond has a put or call option.
Bonds can be grouped into three broad categories depending on their terms to maturity: short-term bonds of one to three years, intermediate-term bonds of four to 10 years, and long-term bonds of 10 to 30 years.
Understanding Term to Maturity
Generally, the longer the term to maturity is, the higher the interest rate on the bond will be and the less volatile its price will be on the secondary bond market. Also, the further a bond is from its maturity date, the larger the difference between its purchase price and its redemption value, which is also referred to as its principal, par, or face value.
Interest Rate Risk
The interest rate on long-term bonds is higher to compensate for the interest rate risk the investor is taking on. The investor is locking in money for the long run, with the risk of missing out on a better return if interest rates go higher. The investor will be forced to forego the higher return or sell the bond at a loss in order to reinvest the money at a higher rate.
The term to maturity is one factor in the interest rate paid on a bond. The longer the term, the higher the return.
A short-term bond pays relatively less interest but the investor gains flexibility. The money will be repaid in a year or less and can be invested at a new, higher, rate of return.
In the secondary market, a bond's value is based on its remaining yield to maturity as well as its face, or par, value.
Why Term to Maturity Can Change
For many bonds, the term to maturity is fixed. However, the term to maturity can be changed if the bond has a call provision, a put provision, or a conversion provision:
- A call provision allows a company to pay off a bond before its term of maturity ends. A company might do this if interest rates decline, making it advantageous to pay off the old bonds and issue a new one at a lower rate of return.
- A put provision allows the owner to sell the bond back to the company at its face value. An investor might do this to recoup the money for another investment.
- A conversion provision allows the owner of a bond to convert it into shares of stock in the company.
An Example of Term to Maturity
The Walt Disney Company raised $7 billion by selling bonds in September 2019.
The company issued new bonds with six terms of maturity in short-term, medium-term, and long-term versions. The long-term version was a 30-year bond that pays 0.95% more than the comparable Treasury bonds.
FAQs
TERMS. "Time to maturity" refers to the length of time that can elapse before the par value(face value) for a bond must be returned to a bondholder. This time may be as short as a few months, or longer than 50 years. Once this time has been reached, the bondholder should receive the par value for their particular bond.
What is term to maturity of a bond? ›
A bond's term to maturity is the length of time during which the owner will receive interest payments on the investment. When the bond reaches maturity the principal is repaid.
What is an example of a bond maturity? ›
For example, a 30-year mortgage has a maturity date three decades from the date it was issued and a 2-year bond has its maturity date twenty-four months from when it was first issued. The maturity date also maps out the period through which the investors will receive interest payments.
What does time to maturity mean for bonds? ›
The time from when the bond is issued to when the borrower has agreed to pay the loan back is called its 'term to maturity'. There are government bonds (where a government is the borrower) and corporate bonds (where a business or a bank is the borrower).
What is an example of a YTM? ›
What is an example of yield to maturity? A YTM example can be an investor buying a bond whose par value is $100. The bond is currently priced at a discount of $95, matures in 12 months, and pays a semi-annual coupon of 5%. Therefore, the current yield of the bond is (5% coupon x $100 par value) / $95 market price.
What is terms to maturity? ›
Term to maturity is the remaining life of a bond or other type of debt instrument. The duration ranges between the time when the bond is issued until its maturity date when the issuer is required to redeem the bond and pay the face value of the bond to the bondholder.
What happens when you hold a bond to maturity? ›
If you hold a bond to maturity, you receive the full principal amount; however, if you want to sell before maturity, you will probably find that your bond is selling at a premium or discount to that amount. Why do bond prices fluctuate? There are two primary reasons: Credit rating changes.
What is the most common bond maturity? ›
Treasury Bonds: long-term, fixed principal securities issued with a 30-year maturity. Outstanding fixed principal bonds have terms from 10 to 30 years. Treasury Inflation-Protected Securities (TIPS): fixed interest securities issued with maturities of five, 10 and 30 years.
Why is bond maturity important? ›
Maturity dates are an essential aspect of bond investing as they determine the length of time an investor will hold the bond before receiving the principal amount. bonds can have various maturity dates, ranging from short-term to long-term.
What is yield to maturity to bond example? ›
Example of a YTM Calculation
The coupon rate for the bond is 15% and the bond will reach maturity in 7 years. The approximated YTM on the bond is 18.53%.
When interest rates rise or fall, investors in mutual funds and ETFs may be more likely to experience volatility in the performance of their investment, while investors in individual bonds who hold their bonds to maturity may not realize any impact.
What is the difference between yield and yield to maturity? ›
A bond's current yield is an investment's annual income, including both interest payments and dividends payments, which are then divided by the current price of the security. Yield to maturity (YTM) is the total return anticipated on a bond if the bond is held until its maturation date.
Should bonds be held to maturity? ›
Capital preservation: Unlike equities, bonds should repay principal at a specified date, or maturity. This makes bonds appealing to investors who do not want to risk losing capital and to those who must meet a liability at a particular time in the future.
What is the yield to maturity for dummies? ›
YTM is the total return expected on a bond if it's held until maturity. The coupon rate is the total amount the bond pays in income to the bondholder for as long as they hold it. The coupon rate is the interest paid annually on the bond's face value.
Is it better to have a higher yield to maturity? ›
The higher the yield to maturity, the less susceptible a bond is to interest rate risk. There are other risks, besides interest rate risk, that can increase yield to maturity: the risk of default or the risk of a bond getting called before maturity.
Do you want a higher yield to maturity? ›
As these payment amounts are fixed, you would want to buy the bond at a lower price to increase your earnings, which means a higher YTM. On the other hand, if you buy the bond at a higher price, you will earn less - a lower YTM.
What is the term to maturity bond price? ›
The prices of bonds with a longer term to maturity are more sensitive to changes in interest rates. Prices of bonds with longer maturities will decline by a larger magnitude as compared to bonds with shorter maturities when interest rates rise.
When a bond matures how much is it worth? ›
Within this time frame, there are short-term bonds (1-3 years), medium-term bonds (4-10 years) and long-term bonds (10 years or more). The end of this term is known as the maturity date. At this point, the full face value of the bond is paid to investors.
How much is a $100 savings bond worth after 30 years? ›
How to get the most value from your savings bonds
| Face Value | Purchase Amount | 30-Year Value (Purchased May 1990) |
|---|
| $50 Bond | $100 | $207.36 |
| $100 Bond | $200 | $414.72 |
| $500 Bond | $400 | $1,036.80 |
| $1,000 Bond | $800 | $2,073.60 |
