Maturity

Lesson

The maturity of a fixed-income instrument refers to the date when the principal amount is due to be repaid to the bondholder. The time to maturity affects the bond's price, yield, and risk profile.

Practice Question #1

Which of the following factors is most directly affected by a bond's time to maturity?

A) Coupon rate

B) Yield to maturity

C) Current yield

D) Yield curve

Select an option above to see an explanation here.

A) Coupon rate is fixed and does not change with time to maturity. B) Yield to maturity is the total return anticipated on a bond if it is held until it matures and is directly affected by the time to maturity. C) Current yield is the annual income from a bond, expressed as a percentage of the bond's current market price, and is not directly affected by the time to maturity. D) Yield curve is a graphical representation of the relationship between bond yields and their maturities and is not directly affected by a single bond's time to maturity.

Terms

Maturity:: The date when the principal amount of a bond or other fixed-income security is due to be repaid to the bondholder.
Time to Maturity:: The time remaining until the bond's maturity date.

Practice Question #2

Which of the following best describes the term "maturity" in the context of fixed income securities?

A) The date when the principal amount of a bond is to be paid back

B) The interest rate paid on a bond

C) The credit rating of a bond issuer

D) The market price of a bond

Select an option above to see an explanation here.

A) Maturity refers to the date when the principal amount of a bond is to be paid back. This is the correct answer. B) The interest rate paid on a bond is called the coupon rate, not maturity. C) The credit rating of a bond issuer is related to the issuer's creditworthiness, not maturity. D) The market price of a bond is the current price at which the bond is trading, not maturity.

Do Not Confuse With

Yield to Maturity (YTM):: The total return anticipated on a bond if held until it matures.

Practice Question #3

What is the primary risk associated with holding a bond until maturity?

A) Interest rate risk

B) Credit risk

C) Reinvestment risk

D) Market risk

Select an option above to see an explanation here.

A) Interest rate risk is the risk that interest rates will rise, causing bond prices to fall. This risk is not specific to holding a bond until maturity. B) Credit risk is the risk that the bond issuer will default on its obligations. This risk is not specific to holding a bond until maturity. C) Reinvestment risk is the risk that an investor will not be able to reinvest the bond's cash flows at the same rate as the bond's yield to maturity. This risk is specific to holding a bond until maturity and is the correct answer. D) Market risk is the risk that the bond's price will fluctuate due to changes in market conditions. This risk is not specific to holding a bond until maturity.

Real-World Example

Suppose an investor purchases a 10-year bond with a face value of $1,000 and a coupon rate of 5%. The bond will pay $50 in interest annually, and the principal will be repaid at the end of the 10 years. If interest rates rise, the bond's price will decrease, and its yield to maturity will increase. Conversely, if interest rates fall, the bond's price will increase, and its yield to maturity will decrease.