Term to Maturity
A bond's term to maturity is the length of time during which the owner will receive interest payments on the investment. Bonds can be grouped into three broad categories depending on 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. The company issued new bonds with six terms of maturity in short-term, medium-term and long-term versions. Generally, the longer the term to maturity is, the higher the interest rate on the bond will be and the less volatile its price will be on the secondary bond market. The interest rate on long-term bonds is higher to compensate for the interest rate risk the investor is taking on.
What Is Term to Maturity?
A bond's term to maturity is the length of time during which the owner will receive interest payments on the investment. When the bond reaches maturity the principal is repaid.
Bonds can be grouped into three broad categories depending on 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.
Understanding Term to Maturity
Generally, the longer the term to maturity is, the higher the interest rate on the bond will be and the less volatile its price will be on the secondary bond market. Also, the further a bond is from its maturity date, the larger the difference between its purchase price and its redemption value, which is also referred to as its principal, par, or face value.
Interest Rate Risk
The interest rate on long-term bonds is higher to compensate for the interest rate risk the investor is taking on. The investor is locking in money for the long run, with the risk of missing out on a better return if interest rates go higher. The investor will be forced to forego the higher return or sell the bond at a loss in order 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 relatively less interest but 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 is based on its remaining yield to maturity as well as its face, or par, value.
Why Term to Maturity Can Change
For many bonds, the term to maturity is fixed. However, the term to maturity can be changed if the bond has a call provision, a put provision, or a conversion provision:
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 versions. The long-term version was a 30-year bond that pays 0.95% more than the comparable Treasury bonds.
Related terms:
Discount
In finance, a discount refers to a situation when a bond is trading for lower than its par or face value. These include pure discount instruments. read more
Duration
Duration indicates the years it takes to receive a bond's true cost, weighing in the present value of all future coupon and principal payments. read more
Fixed Income & Examples
Fixed income refers to assets and securities that bear fixed cash flows for investors, such as fixed rate interest or dividends. read more
Long Term & Example
Long term refers to the extended period of time that an asset is held. Depending on the type of security, a long-term asset can be held for one year or many years. read more
Maturity
Maturity refers to a finite time period at the end of which the financial instrument will cease to exist and the principal is repaid with interest. read more
Put Provision
A put provision allows a bondholder to resell a bond back to the issuer at par after a specified period but prior to the bond's maturity date. read more
Short-Term Assets
Short-term assets refer to those that are held for a short period of time or assets expected to be converted into cash in the next year. read more
Term Bond
Term bonds mature on a specific date in the future and the bond face value must be repaid to the bondholder on that date. read more
Yield to Maturity (YTM)
Yield to maturity (YTM) is the total return expected on a bond if the bond is held until maturity. read more
Zero-Coupon Bond
A zero-coupon bond is a debt security that doesn't pay interest but trades at a deep discount, rendering profit at maturity when it is redeemed. read more