In a financial context, “maturity” refers to the date on which the principal or stated value of a financial instrument becomes due and is repaid to the investor, and interest payments stop. This term is most commonly used for fixed-income instruments, such as bonds or certificates of deposit (CDs).
For example, if a company issues a 5-year bond on January 1, 2023, the bond will mature on January 1, 2028. At the maturity date, the company will repay the bond’s principal amount to the bondholders and cease any remaining interest payments.
However, “maturity” can also refer to the life cycle of products or industries. A mature industry or product has reached a state of equilibrium, characterized by stable or slowly declining growth rates, and companies in mature industries primarily compete for market share rather than for market growth.
For example, the soft drink industry is often considered mature because it has a wide consumer base, and its growth is typically slow and stable. Firms in this industry, like Coca-Cola and Pepsi, are more focused on new product variations, marketing, and gaining market share from each other rather than seeking out new, untapped markets.
Example of Maturity
Let’s take the example of a bond to illustrate the concept of maturity in finance.
Imagine an investor purchases a bond issued by a corporation. The bond has a face value of $1,000 (which is the amount the investor will receive when the bond matures) and an annual interest rate (also known as the coupon rate) of 5%. The bond’s maturity date is 10 years from the purchase date.
Every year for 10 years, the investor will receive an interest payment of $50 (5% of $1,000). These interest payments are usually made semi-annually, so the investor would receive $25 every six months.
After 10 years, on the bond’s maturity date, the corporation will pay the investor the bond’s face value of $1,000. This is the final payment the investor receives from the bond. After this point, the corporation has no more obligations to the bondholder, and the investor does not receive any more payments.
In this example, the maturity date is important because it tells the investor when they will receive the face value of the bond and cease receiving interest payments. It also gives the investor an idea of how long they will be exposed to the credit risk of the bond issuer.
The concept of maturity is central to the pricing and valuation of fixed income securities, as it helps determine the present value of future cash flows from the investment.