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What is maturity?
In finance, maturity refers to the date on which the principal balance of a loan becomes due and payable. It also refers to the date when a bond pays off its principal with interest.
Maturity refers to the date on which an issuer or borrower of a loan or bond must repay the principal amount and interest to the holder or investor. The maturity date designates the lifespan of a security, informing the issuer when he must repay the principal amount and interest.
Once the maturity date passes and principal and interest have been repaid, the issuer’s contractual obligations are terminated. No additional payments are required after the maturity date. Also referred to as a redemption date, maturity can range from one to 30 years, depending on the the issuer’s financial needs.
Debt instruments such as a note or bill, draft and acceptance bond often are classified in terms of their maturity dates. Bonds with a maturity date of one year or less are known as short-term bonds, while those with a maturity date of more than one year are considered long-term.
For most bonds, the specific maturity date is indicated on the bond certificate. Although maturity always refers to a specific date of principal repayment, there’s an exemption to that rule. For instance, some companies issue bonds that are “callable.” A callable bond allows the issuer to redeem it at any time before the specified maturity date.
Assume an investor purchased a bond issued at $100 with a maturity date of Jan. 1, 2020. In most cases, until the specified maturity date, the bond will continue to trade and pay interest to the investor regularly.
If the bond is held until Jan. 1, 2020, then the issuer will return the principal amount of the bond and pay any remaining interest.
Forgot about your matured certificate of deposits (CDs)? Find out what happens to it.