Financial Maturity - What is it?



What is maturity? 

Maturity refers to the date in which the financial instrument (be it a deposit, foreign exchange spot, forward transaction, interest rate and commodity swap, options, loans and fixed income instruments such as bonds) ends. At this point it must either be renewed or it will cease to exist. The end date will typically trigger the repayment of the financial instrument. 

Some financial instruments, deposits and loans for example, require repayment of principal and interest at maturity; other, such as foreign exchange transactions provide for the delivery of a commodity. Interest rate swaps consist of a series of cash flows with the final one occurring at maturity. 

What is a maturity date? 

The maturity date refers to the moment within a period in which the principal of a fixed income instrument must be repaid to an investor. The maturity date is used to classify bonds into three main categories: short-term (one to three years), medium-term (10 or more years) and long term (typically 30 year treasury bonds). Once the maturity date is reached the interest payments regularly paid to investors cease since the debt agreement no longer exists and the full amount owed must be paid back. 

So in Practise....

So for example, say an investor purchases a $5,000 six year bond paying a coupon rate of 5% per year semi-annually. This means the investor will receive 12 coupon payments of $125 each, or a total of $1,500 and when the bond matures will receive that $5,000 he/she invested, making a total of $6,500. 

However, not all bounds may reach maturity. Callable bonds are quite common and allows the issuer to retire a bond before it matures. Call provisions are outlined in the bonds prospectus and the indenture, which collectively set out the terms and conditions of the bond. 

The maturity date of a spot foreign exchange transaction is two business days, with the exception of U.S. dollar vs. Canadian dollar transactions which settle on the next business day. On that date, company A pays currency A to company B who receives currency B in return. 

The maturity date on a foreign exchange forward or swap is the date on which the final exchange of currencies takes place; it can be anything longer than spot. 


Hi, Demitrius here. Welcome to my page.

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