Term to Maturity
What Is Term from Maturity's point of view?
A bond's term to maturity is the time span during which the owner will receive interest payments on the investment. At the point when the bond arrives at maturity the principal is repaid.
Bonds can be assembled into three broad categories relying upon their terms to maturity: short term bonds of one to five years, intermediate-term bonds of five to 12 years, and long term bonds of 12 to 30 years.
Grasping Term to Maturity
For the most part, the longer the term to maturity is, the higher the interest rate on the bond will be and the less unpredictable its price will be on the secondary bond market. Likewise, the further a bond is from its maturity date, the bigger the difference between its purchase price and its redemption value, which is likewise alluded to as its principal, par, or face value.
Interest Rate Risk
The interest rate on long-term bonds is higher to make up for the interest rate risk the investor is taking on. The investor is securing in money for the long run, with the risk of missing out on a better return on the off chance that interest rates go higher. The investor will be forced to forego the higher return or sell the bond at a loss to reinvest the money at a higher rate.
The term to maturity is one factor in the interest rate paid on a bond. The longer the term, the higher the return.
A short-term bond pays somewhat less interest however the investor gains flexibility. The money will be repaid in a year or less and can be invested at a new, higher, rate of return.
In the secondary market, a bond's value depends on its excess yield to maturity as well as its face, or par, value.
Why Term to Maturity Can Change
For some bonds, the term to maturity is fixed. Notwithstanding, the term to maturity can be changed in the event that the bond has a call provision, a put provision, or a conversion provision:
- A call provision permits a company to pay off a bond before its term of maturity closes. A company could do this in the event that interest rates decline, making it worthwhile to pay off the old bonds and issue another one at a lower rate of return.
- A put provision permits the owner to sell the bond back to the company at its face value. An investor could do this to recover the money for another investment.
- A conversion provision permits the owner of a bond to change over it into shares of stock in the company.
An Example of Term to Maturity
The Walt Disney Company raised $7 billion by selling bonds in September 2019.
The company issued new bonds with six terms of maturity in short-term, medium-term and long-term variants. The long-term form was a 30-year bond that pays 0.95% more than the comparable Treasury bonds.
Features
- At the point when the bond arrives at maturity, the owner is repaid its par, or face, value.
- A bond's term to maturity is the period during which its owner will receive interest payments on the investment.
- The term to maturity can change in the event that the bond has a put or call option.
