Maturity DateWhen a Debt Instrument Matures

Most, if not all, financial instruments have set dates where they become due.

For example, when you avail of a certificate of deposit from a particular bank, there’s a set date when it becomes due.

When that date comes, you can withdraw your deposit (along with all the accumulated interests) without having to worry about penalties.

Another example, if you take out a loan, there’s a set date when you must fully repay it (usually with interest).

Knowing when a financial instrument (especially if it’s a debt instrument) becomes due is important both for the instrument holder and issuer.

I mean, you wouldn’t want to unnecessarily spend more due to penalties, right?

If you can avoid it, then you should.

That’s why you should be mindful when a financial instrument becomes due.

In this article, we will be taking a closer look at this set date when a financial instrument becomes due.

For starters, we refer to this date as the “maturity date”.

Why is it referred to as that? Why use the term “maturity”?

Hopefully, we can confidently answer these questions (and some more) by the end of the article.

What is a Maturity Date?

Maturity date refers to the date when a financial instrument becomes due.

Or in other words, when the financial instrument reaches its maturity.

It is often related to debt instruments such as bonds, loans, promissory notes, etc.

That said, it’s not exclusive to just debt instruments.

But what does that mean for the instrument holder and issuer?

Well, it will depend on the financial instrument.

In the case of loans, the maturity date refers to the set date when the loan principal must be fully paid.

You’d often see this date explicitly stated on the financial instrument.

It also means that the debtor ceases his/her payment of interest to the creditor.

If the debtor fails to repay the loan on time, s/he will be incurring penalties depending on what was agreed upon between him/her and the creditor.

In the case of a certificate of deposit, the maturity date refers to the set date when the deposit becomes redeemable without penalties.

Unlike your regular deposits, a certificate of deposit is a debt instrument that banks issue to raise money.

The holder of the instrument enjoys a higher than usual interest rate.

In exchange, the holder can only withdraw the deposit when the instrument matures.

If the depositor withdraws his/her certificate of deposit at a date earlier than the maturity date, there is usually an early withdrawal penalty.

An instrument’s maturity date is important for both the issuer and the holder.

It signifies when liabilities and benefits end.

It defines the lifespan of the financial instrument.

You’d be hard-pressed to find a loan agreement that doesn’t have a due date.

Some loans even have several maturity dates in the sense that they have to be paid in multiple installments.

Understanding Maturity Date

An instrument’s maturity date defines its lifespan.

To most debt instruments, it indicates when they should be paid back in full.

For certificates of deposit, it indicates when the depositor can withdraw his/her deposit, as well as collect on accumulated interests.

For some instruments, maturity date represents the time when they can be exercised.

Take for example, options. The maturity date of an option represents the date on which the underlying transaction settles should the holder choose to exercise it.

The maturity date of an instrument also defines the period in which one party pays for certain benefits while the other party receives them.

This usually comes in the form of interest payments, which is usually the case for loans and other debt instruments.

During the life of the instrument, this liability of paying benefits (as well as receiving them) will continue until such time that it reaches maturity.

At the instrument’s maturity date, such liability ceases to exist.

Do note that there are specials cases where a financial instrument may be “callable”.

In such cases, the issuer of the instrument reserves the right to pay back the principal at any time.

Meaning that the life of the instrument may be cut short way before its maturity date.

This is often the case with fixed-income securities.

It’s best to inquire about these instruments before availing of them.

This is especially if you’re averse to callable securities.

Classifying Maturity

A financial instrument may have a term of 12 months.

Or it may have a term of 30 years.

Whatever the case, you can tell a financial instrument’s term by its maturity date.

The term is the difference between the maturity date and the date the instrument starts.

Depending on the term, the instrument can be classified into one of the three categories:

• Short-term – this refers to financial instruments that mature in one or more years, but usually less than ten years; most certificates of deposit fall under this classification
• Medium-term – this refers to financial instruments that mature in ten or more years; some loans may fall under this category (usually housing or car loans)
• Long-term – this refers to financial instruments that mature in a longer amount of time compared to medium-term ones. An example of this is a 30-year Treasury bond.

This classification system is especially helpful for different kinds of investors.

Some investors may prefer short-term instruments over long-term ones, while some may prefer the opposite.

Or they could be in the middle and prefer medium-term ones.

In some cases, the difference in terms may mean a difference in quality.

For example, a certificate of deposit that has a term of five years may offer a higher interest rate compared to one that has a term of only one year.

Another example, a loan that has a longer term may demand a higher interest rate when compared to a loan that has a shorter term.

Instruments that have longer terms often demand higher interest rates due to the risk that they carry.

The longer the term of an instrument is, the higher the risk of default or non-payment at the maturity date. There’s also the effect of inflation that we need to consider.

Maturity for Certain Types of Financial Instruments

Maturity of Bonds

For bonds, which are a type of debt instrument, the maturity date signifies when it must be paid in full, plus any applicable interest payment.

Failure to pay at the maturity date often entails late penalty fees for the debtor.

Not only that, it will negatively affect his/her credit rating.

In between the commencement date of the bond and its maturity date, the lender usually receives interest payments.

Bonds that have longer terms often carry higher interest rates.

Once the bond reaches its maturity, the holder can expect to receive its face value from the issuer.

At that point, interest payments will also stop.

Maturity of a Deposit

A certificate of deposit is a type of debt instrument that banks issue to raise money.

They often offer higher interest rates than regular deposits.

For this kind of financial instrument, the maturity date represents when the depositor can withdraw his/her deposit without penalties.

Or if we flip the script, it represents when the issuer must return the deposit to the holder of the certificate of deposit.

Some certificates of deposits are auto-renewing, meaning they automatically renew their term if the certificate holder does not redeem it upon maturity date.

Some may even offer early withdrawals at no cost.

Maturity of Derivatives

For derivatives such as options or forward contracts, the maturity date represents when they can be exercised by the holder.

In some cases, the maturity date may also be the derivative’s expiration date.

However, it’s important to note that this isn’t always the case.

Sometimes, a derivatives maturity date can be distinguishable from its expiration date.