It’s easy to think of a loan’s maturity date as the last day when you should have paid your financing in full. Truthfully, that is just one idea of its definition. All loans have different maturity dates. However, this concept has its respective and relevant meaning to bonds and other fixed-income investment mediums.
A loan’s maturity date is critical for conservative investors who find complacency in seeing a fund or bank’s projection table of future profit. For borrowers, it serves as a definite time frame to address any financing or loan they have with a financial institution.
How Does It Work?
Loan maturity dates are fixed deadlines that bank actuaries and accountants set for their financial products. Often, different banks will have the same timespan for loan products of every category. For example, Singapore’s SME Working Capital Loan can have a 5-year payment period or loan maturity rate.
Alternatively, loan maturity rates connect with bonds and other fixed-income investments. Their premise is simple: once you buy their bonds — which function like “I owe you” documents — they promise to finance a particular amount in the future regardless of market changes.
Unfortunately, bonds have a high likelihood of default, but companies and governments offset this through coupon rates that add value to them yearly (like conventional per-annum principal and interest rate on long-term loans).
Understanding Maturity In-Depth
Original Maturity Date
This is the date a company or government first issued its bond. For example, if Company A issued a 30-year bond five years ago in 2015, its original maturity date is 30 years after issuance. Company A’s current maturity date is 25 years during its 2020 evaluation.
Original maturity dates are essential in plotting the amortization schedule and differing interest rates and bond values for actuaries. It serves as the starting point when calculating final maturity values.
What Happens When a Loan Reaches Maturity?
Once your loan reaches maturity, you’ll need to have paid it in full. In most cases, banks and financial institutions allow you to settle the remaining interest payment through a separate loan. In this light, you’ll need only to pay the loan’s principal.
For securities and bonds, the company or government is the borrower who must pay you back. Depending on your terms and conditions, they’ll pay the fixed-income bond value first (as they promised) before the additional coupon rates (that act like interest rates) afterward.
What Happens When You Fail To Pay Your Mortgage Completely After Maturity?
Like any defaulted bank loan, banks will send you a letter demanding your total principal payment due and payable. They have legal rights to file a claim against you or assign a debt collector to handle your unpaid matured mortgages.
How Do You Calculate Loan Maturity Dates?
Truthfully, you cannot calculate your loan maturity dates because the lender already determines them. However, you can calculate the loan maturity value of bonds.
You can use the following equation to find it:
Maturity Value = Principal x (1 + periodic rate)^Compounding Intervals
If you have a bond fixed-income principal amount of S $10,000 by 5 years with a coupon rate of 4.8 percent per month.
You will get a periodic rate of 0.004, which comes from the equation:
Periodic rate = 4.8/12
To calculate your compounding intervals, you need to multiply the current or original maturity date by the frequency of coupon rate increase. In this example, your principal pays out by 5 years, and you get coupon rate increases per month. Your compounding intervals is 60.
Compounding intervals: 5×12
In a calculation, here is how it looks like:
Maturity value = S $10,000 x (1 + 0.004)^60
Maturity Value = S $12,706.41
Maturity comes in three different categories, which include the following:
Short Term: Bonds maturing in 1-3 years
Medium Term: Maturing in 10 years
Long-Term: Commonly, the 30-year treasury bonds. However, no limit to the years of long-term maturity bonds exist.
Explaining The Maturity Date – Coupon Rate – Yield to Maturity Relationship
Bonds with longer maturity terms tend to have higher coupon rates because of the perceived increased risk of corporations or governments defaulting.
Most investors perceive inflation to increase over time. When they increase, interest rates become higher, lowering bond values. In this light, the bond’s yield to maturity and coupon rates meet at the same point by the bond’s maturity date.
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