August 29, 2023 |5 min read
A maturity date is the specific date on which the principal amount of a debt—like an installment loan, mortgage or bond—is due, along with any interest payments. Maturity dates help lay out the timelines of investments or loans and can affect interest rates and the level of risk associated with products.
Key takeaways
- Maturity date refers to the date when a debt’s principal and interest are due.
- Many different kinds of debt use maturity dates, including mortgages, bonds and certificates of deposit (CDs).
- Maturity dates help sort securities like bonds into categories of short-, medium- and long-term.
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Sign up todayWhat is the purpose of a maturity date?
Maturity dates establish the endpoint of a debt instrument—a financial product used to raise money for an individual or corporation. A debt instrument typically involves a lender, a borrower and a set of terms. Common debt instruments include loans, bonds and CDs.
The maturity date functions similarly across different debt instruments—it indicates the date of repayment for the principal amount and when interest payments end. In the context of an installment loan, the maturity date refers to the termination date of the debt. The maturity date can also refer to the expiration date of a contract for derivatives, like futures or options.
Depending on the type of debt instrument, typical maturity dates can look a little different.
Bonds
A bond is an example of a fixed-income security, which means that it pays a set amount of interest periodically until it matures. Once a bond reaches maturity, interest payments cease.
Different bonds can have varying maturities. Corporate bonds, for instance, can reach maturity in under three years. On the other hand, government-issued savings bonds may have maturity dates 20-30 years after they’re issued.
Certain bonds may be “callable,” which means the bond issuer can pay back the principal before the maturity date, stopping interest payments early.
CDs
Similar to a bond, a CD is an investment product that pays interest on a lump sum of money over a specified period. Unlike bonds, though, CDs are backed by the Federal Deposit Insurance Corporation (FDIC).
The maturity date helps establish the length of the CD. If the holder of the CD does not cash it in at maturity, the financial institution may renew the CD at the same term, but the interest rate could change.
Promissory notes
A promissory note is essentially a written promise to pay back funds at a later date. While anyone can invest in promissory notes, they’re generally marketed toward corporate or other experienced investors. The note typically includes the terms of the debt agreement, including the payment schedule and maturity date.
Maturity dates on promissory notes can range from a few months to several years.
Mortgages
A mortgage’s maturity date helps indicate the length of the mortgage. Typical mortgage lengths are 15 and 30 years. So a 15-year mortgage loan’s maturity date would be 15 years after the mortgage was issued.
The maturity date will also determine interest payments. Typically, the longer the loan term, the smaller the monthly payments will be.
Types of maturity dates
Maturity dates help sort securities like bonds into general categories based on term length:
- Short-term maturity: Securities that mature in 3-5 years are typically known as short-term.
- Medium-term maturity: Securities that mature in 4-10 years are typically known as medium-term or intermediate-term.
- Long-term maturity: Securities that mature in 10 years or more are known as long-term.
How maturity date affects maturity value
The term “maturity value” refers to the amount an investor receives when a debt instrument matures. Because the maturity date determines the amount of time a debt accrues interest, it will affect maturity value. Depending on whether your debt instrument uses simple or compound interest, you can calculate maturity value differently.
Maturity value and simple interest
For simple interest, the maturity value is calculated by multiplying the principal by the interest rate and term to maturity, then adding that to the principal amount. Here is a simple formula to express maturity value:
Maturity value = principal + (principal x interest rate x years to maturity)
So if you were to purchase a bond for $1,000 that earns interest at 5% and reaches maturity in 10 years, you’d receive $50 annually or $500 in interest after 10 years. Including the principal, you’d receive $1,500 total.
Maturity value and compound interest
For compound interest, the maturity value is calculated by multiplying the principal by 1 plus the interest rate raised to the number of compounding periods. Here is a simple formula for expressing maturity value in compound interest:
Maturity value = principal × (1+interest rate)^number of compounding periods
So if you purchase a debt instrument at $1,000 with a 5% interest rate over 10 years, but it compounds twice annually, you would earn $1,653.29.
Maturity date FAQ
Here are some frequently asked questions about maturity dates:
Can a maturity date change?
A maturity date can change for several reasons across the life of a debt. A maturity date may change if:
- The borrower defaults on the loan
- The borrower incurs interest fees
- The borrower pays off a loan early
What happens if you pay before the maturity date?
Some lenders charge a fee for early repayment. For instance, some mortgages come with a prepayment penalty if you pay off your mortgage early. You can check with your lender for more details.
Paying off a loan early can also temporarilyhurt your credit scores. Closing out a loan can decrease the diversity of yourcredit mix, which can lower your credit scores in the short term.
What happens when a loan matures and is not paid off?
If a borrower fails to make payments on a loan, they run the risk of defaulting. Failure to pay a personal loan, for instance, could result in default. When a borrower doesn’t make payments on their mortgage, the account goes into delinquency. This could result in foreclosure, and the borrower could lose their home.
Maturity dates in a nutshell
Maturity dates are an important part of any debt, helping establish the timeline of the debt. While the maturity date generally indicates the debt’s due date or the date of final payment, it can vary depending on the type of debt involved.
Dive deeper into investing by learning about other financial instruments and how they might play into your personal finance journey.
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