Maturity
Tue, Apr 15Maturity refers to the date when the principal or face value of a financial instrument, such as a bond or term deposit, is due to be paid to the investor by the issuer.
Here’s a more detailed look:
Bonds: When a bond matures, the bond issuer commits to repaying the bondholder the full face value of the bond. For instance, if an investor purchases a 10-year bond with a face value of $1,000, the maturity date will be ten years from the purchase date, at which point the investor will receive the $1,000 back from the bond issuer.
Loans: In the case of a loan, the maturity date is when the principal amount becomes due and must be repaid to the lender.
Derivatives: For futures or options contracts, the maturity date marks the expiration of the contract.
Certificates of Deposit (CDs): For a CD, the maturity date signifies the end of the deposit period, at which time the deposited funds, along with the agreed-upon interest, are returned to the depositor.
Understanding the maturity date of a financial instrument is crucial as it indicates when you can expect to receive payment and is vital for evaluating the risk and return of an investment.
Generally, the longer the maturity, the higher the degree of price risk, meaning the bond price may fluctuate more with changes in interest rates. However, longer maturities usually offer higher interest rates to offset this price risk.
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