Debt, for investment purposes, is money that a corporation or government entity borrows from an investor. In exchange for the loan, the debt issuer promises to return the amount of the loan along with regular interest payments. Debt maturity refers to the date the contract between issuers and investors ends. If you hold a debt instrument, the maturity date will play a role in the volatility of your investment.
Definition of Debt Maturity
When you buy a debt instrument, such as a bond, it will carry a maturity date. You'll receive your interest payments until the maturity date, at which point you will receive a lump-sum payment from the issuer. The return of this capital, known as the par value, is a standard amount depending on the type of security. For example, for almost all bonds, the principal amount you'll receive at maturity is $1,000 per bond. This amount is fixed and may not be the same amount you paid for the bond. If you bought 10 U.S. Treasury bonds that mature on Oct. 4 of this year, you'll receive $10,000 on that date, regardless of what you originally paid.
Interest Rate Risk and Maturity
Bonds tend to fall in value when market interest rates rise. This phenomenon is known as interest rate risk. The longer the maturity date on your debt instrument, the more susceptible its price is to variations in interest rates. In exchange for this risk, longer maturity debt typically pays a higher interest rate than shorter maturity debt.
Some bonds are callable so that the issuer can purchase them back from the investor for a specified price. Unlike a maturity date, which is a mandatory redemption date, a call date is optional, at the discretion of the issuer. Typically, an issuer will call a debt instrument only if interest rates have fallen. This way, the issuer can pay off the higher-rate old debt and issue new debt at a lower interest cost. After the call date has passed, the debt will continue until the maturity date.
Sales Before Maturity
If you sell a debt instrument before it matures, you may receive more or less than you paid for it, depending on the current market price. You may also receive more or less than the security's maturity value. One of the benefits of a bond maturity date is that no matter how high interest rates rise — something that would otherwise drive the price of a bond down — you will always receive the par value of the bond at maturity.
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