What is a Maturity?
How Does a Maturity Work?
Let's assume that on January 1, 2000, you purchased an XYZ Company will pay you (or whomever you happen to sell the to) the face value (also called the par value) of the . The face value is essentially the size of the I.O.U. represented by the security certificate. That is, the face value is the original lent to the company. face values are usually $1,000, and face values are usually $25.that had a 10-year maturity. That means that on January 1, 2010, XYZ Company
Some maturities are short-term (a year or less), others are intermediate-term (usually two to 10 years) and many are long-term (a period of 10 to 30 years or more). with maturities of less than 10 years are typically called notes.and
Sometimes investors get their original call provisions allow an to redeem, or call, a or before it matures. like this provision because if interest rates fall they can pay off the securities with proceeds from new securities issued at a lower interest rate. Investors don't always welcome this because they lose their ability to collect what could be above-market interest payments and they may have to reinvest the money from their redeemed securities at a lower interest rate. To compensate investors for these risks, of callable usually agree to pay more than the face value depending on when the securities are redeemed.back before the maturity date. This usually happens when the takes advantage of special provisions that a security might have. For example,
Another example is the sinking fund provision, which requires the to make payments to a trustee while the securities are outstanding. The trustee then uses the funds to repurchase some or all of the securities on the open .
Usually issuers control whether a security is redeemed before it matures, but in some cases, investors can control this process. A convertible bond, for example, gives the bondholder the to exchange the for a predefined number of securities (usually the stock) at some future date and under prescribed conditions. An exchangeable , on the other hand, allows the bondholder to exchange the for the stock of a company other than the . Putable and allow their holders to force the to redeem the security at a set price under certain conditions.
Why Does a Maturity Matter?
The maturities of and are very important. Not only do they tell investors when they will be repaid, they are crucial to mathematically determining the appropriate price of the security. This is because the formulas used to price these securities often involve finding the present value of that future return of . The longer the investor has to wait for the return of his capital, the less the security tends to be worth.
It is important to note that just because a will pay a certain amount at maturity doesn't that’s what the is worth today. Often, investors can purchase for more or less than . For instance, if the Company XYZ has a $1,000 , it still may only be worth $800 today, or it may be worth $1,500 today depending on conditions, coupon rates and whether there are any special provisions like those described above.