What Is Maturity Date?

When you purchase a certificate of deposit or a bond of some kind, you are lending your money to the issuing institution. These debt instruments are used by banks, corporations and governments to borrow money, and they all share some basic characteristics. Each pays a fixed amount of money to the investor and is issued for a specific period of time called the maturity. The length of the maturity can range from a few weeks to 30 years or more. Regardless of the length of time, the day the debt instrument matures is the maturity debt and the borrowed money must be repaid at that time. In the meantime, only interest is paid, either by periodic disbursements or by adding earned interest to the balance. The maturity date is thus the due date when the entire debt must be settled.

Fixed-term

Debt instruments with maturity dates are often known as fixed-term securities. There are two forms fixed-term securities take. CDs and most bonds are issued (first sold) at or near their face value, which is the amount that must be repaid at maturity. Interest is paid periodically. Savings bonds are sold at a discount from their face value and accumulate interest, reaching their face value on the maturity date. Some municipal bonds (the collective term for state and local government bonds) called zero-coupon bonds are structured lie savings bonds and are sold at a discount and accumulate interest until maturity.

Traded Bonds

Except for CDs, savings bonds and most short-term corporate and government fixed-term securities, bonds are traded like shares of stock and vary in price, depending on several factors. The primary price influences are changes in interest rates and the creditworthiness of the issuing institution. The maturity date also affects price, however. As a bond approaches the maturity date, its price approaches the face value regardless of other factors because the bond will soon be redeemed at full face value. Long-term bonds carry somewhat more risk (there being less certainty about events decades in the future than in the next few months or years) and have higher interest rates to compensate.

Non-negotiable Bonds

CDs and savings bonds are non-negotiable. That is, they are not traded on bond markets and so are not subject to price fluctuations. These types of fixed-term investments also pay higher rates for longer-term maturities, though for different reasons. The bank (and the Treasury Department) want you to leave the money with them for long periods and are willing to pay an interest premium as an incentive for doing so.

Risk

Investing in fixed-term securities with long maturities carries some risks. This is true even if the credit risk of the issuer is not a concern, as with CDs (which are insured) or Treasury bonds, which are backed by the U.S. government. If interest rates rise, you may find yourself locked into a CD or bond, losing out on added income. Inflation can significantly reduce the value of the dollar over long periods. When the bond is redeemed on the maturity date, you have less buying power. Some traded bonds are "callable" meaning that the issuer can redeem them before the maturity date. This is likely if interest rates fall significantly below the rate at the time of the bond's issue. The issuer can then sell new bonds at a lower interest and you lose out on that high interest rate.

Money Markets

Money market funds are a popular way to earn moderately high interest on savings. The portfolios of money market funds are composed of short term corporate and/or government bonds. Maturities are usually less than 6 months. These are bonds institutions issue to pay immediate expenses. Because they are so short-term, the price rarely diverges much from the face value and long-term risks are not an issue. However, the near-term maturity dates mean that the bonds are constantly being redeemed and replaced by new issues. The interest rates of individual bonds are fixed, but because the makeup of the fund portfolios is in constant flux, the overall interest rates on money market accounts are variable.