Maturity
The term to maturity of a bond is the number of years over which the issuer has promised to meet the conditions of the obligation. The maturity of a bond refers to the date that the debt will cease to exist, at which time the bond issuer will redeem the bond by paying the amount borrowed. The maturity date of a bond is always identified when describing a bond. For example, a description of a bond might state “due 12/1/2020.” The practice in the bond market is to refer to the “term to maturity” of a bond as simply its “maturity” or “term.” As we explain later, there may be provisions in the bond agreement that allow either the bond issuer or bondholder to alter a bond’s term to maturity.
There are three reasons why the term to maturity of a bond is important. The most obvious is that it indicates the time period over which the bondholder can expect to receive interest payments and the number of years before the principal will be paid in full. The second reason is that the yield on a bond depends on it. Finally, the price of a bond will fluctuate over its life as interest rates in the market change. The price volatility of a bond is dependent on its maturity. More specifically, with all other factors constant, the longer the maturity of a bond, the greater the price volatility resulting from a change in interest rates.
September 26th, 2010