A “Maturity Date” in finance refers to the date on which the principal amount of a loan, bond, or any other debt instrument becomes due and is to be paid back to the lender, creditor, or investor. It is essentially the deadline for repaying the principal of a debt.
For example, if you take out a 30-year mortgage loan to buy a house on January 1, 2023, the maturity date of that loan would be January 1, 2053. On this date, all outstanding principal and interest should be fully repaid.
Similarly, if a company issues a five-year bond on July 1, 2023, then the bond’s maturity date would be July 1, 2028. On this date, the company would be required to pay back the bond’s face value to the bondholders.
The maturity date is a critical factor in the pricing of bonds and loans. Typically, longer maturity dates are associated with higher risk due to the increased uncertainty over a longer period, and therefore require a higher interest rate to compensate for that risk.
Example of a Maturity Date
Let’s illustrate this with an example of a bond.
Imagine an investor named John buys a bond issued by XYZ Corporation on January 1, 2023. This bond has a face value of $10,000 and a maturity period of 10 years, with an annual interest rate (or coupon rate) of 5%.
The bond’s maturity date, then, would be January 1, 2033. This means that XYZ Corporation is obligated to pay the face value of the bond, $10,000, back to John on that date.
In addition, John will receive annual interest payments on the bond at the rate of 5% until the maturity date. This means that every year until 2033, he will receive $500 (5% of $10,000) from XYZ Corporation.
The maturity date is an essential factor for John when he’s deciding whether to invest in the bond, as it tells him how long his money will be tied up and how long he will be exposed to the credit risk of XYZ Corporation. If John believes that the company will still be able to repay him in 2033, he might be comfortable buying the bond.