Maturity

Definition

Maturity is a term used to indicate the due date of a loan, bond, lease, or insurance policy. It marks the point in time when the principal amount or entire sum is scheduled to be repaid, or the contract expires. Maturity dates are critical in financial planning as they determine the timeline for repayment and interest accruals.

Examples

Loan Maturity: A 30-year mortgage loan has a maturity of 30 years. Monthly payments are calculated so the principal amount is amortized by the maturity date.
Bond Maturity: A bond with a 20-year maturity generally makes periodic interest payments throughout its term, with the full principal repaid at maturity.
Lease Maturity: A commercial lease may have a 10-year maturity, after which the contract expires unless renewed.
Insurance Policy Maturity: A term life insurance policy might have a maturity date of 20 years, marking the expiration of the coverage period.

Frequently Asked Questions (FAQs)

What happens when a loan reaches maturity?

When a loan reaches its maturity, the borrower is required to pay the remaining balance of the principal. For interest-only loans, the entire principal must be repaid at maturity.

Can you extend the maturity date of a loan?

Yes, extending the maturity date of a loan is often possible through refinancing or modifying the loan terms, subject to lender approval.

What is bond maturity, and why is it important?

Bond maturity is the date when the bond issuer must repay the bondholder the principal amount. It is important because it affects the bond’s yield, interest payments, and investment duration.

How does lease maturity impact tenants and landlords?

Lease maturity marks the expiration of the lease contract. Tenants may need to negotiate a renewal or seek other accommodations, while landlords may look for new tenants.

Are there penalties for not adhering to maturity dates?

Yes, failure to adhere to maturity dates can result in penalties, additional interest, or loss of collateral, depending on the terms of the agreement.

Amortization: The process of gradually paying off a debt over a period, involving regular payments that cover principal and interest.
Principal: The original sum of money borrowed in a loan or invested in a bond, not including interest.
Interest: The cost of borrowing money, typically expressed as a percentage of the principal.
Refinancing: The process of replacing an existing loan with a new one, usually with better terms.
Yield: The income return on an investment, typically expressed as an annual percentage.

Online Resources

References

Brigham, Eugene F., and Michael C. Ehrhardt. “Financial Management: Theory & Practice.”
Ross, Stephen A., Randolph W. Westerfield, and Bradford D. Jordan. “Fundamentals of Corporate Finance.”

Suggested Books

“The Bond Book” by Annette Thau
“The Mortgage Encyclopedia” by Jack Guttentag
“Principles of Financial Engineering” by Salih N. Neftci

Real Estate Basics: Maturity Fundamentals Quiz

### Does maturity apply to the contract date or when the principal value must be repaid? - [ ] The contract initiation date - [x] When the principal value must be repaid - [ ] Monthly payment dates - [ ] Halfway through the loan term > **Explanation:** Maturity specifically refers to the date by which the principal value of a loan, bond, lease, or insurance policy must be fully repaid or the contract ends. ### What happens if a borrower cannot repay a loan at maturity? - [ ] The loan is automatically forgiven. - [ ] The borrower is jailed. - [x] The borrower may face penalties and additional interest. - [ ] The borrower must immediately refinance. > **Explanation:** Failure to repay a loan at maturity can lead to penalties, additional interest, or other consequences as specified in the loan agreement. ### Are maturity dates applicable for both loans and bonds? - [x] Yes, both loans and bonds have maturity dates - [ ] Only loans have maturity dates - [ ] Only bonds have maturity dates - [ ] Maturity dates relate to neither loans nor bonds > **Explanation:** Both loans and bonds have maturity dates specifying when the principal amount is due for repayment. ### What term describes the gradual repayment of a loan over time? - [ ] Accrual - [x] Amortization - [ ] Yield - [ ] Capitalization > **Explanation:** Amortization is the process where periodic payments gradually pay off a loan's principal and interest. ### Can maturities of loans and bonds be renegotiated? - [x] Yes, typically through refinancing or bond redemption - [ ] No, they are always fixed - [ ] Only in instances of bankruptcy - [ ] Only if both parties fail the original agreement > **Explanation:** Maturity dates of loans can often be renegotiated through refinancing, and bonds can be redeemed or bought back before maturity under certain conditions. ### What happens at the maturity date of a lease? - [ ] The lease's terms renew automatically. - [x] The lease contract expires. - [ ] Tenants must vacate immediately. - [ ] New terms must be negotiated. > **Explanation:** The maturity date of a lease marks the expiration of the lease contract unless a renewal has been previously agreed upon. ### How does maturity affect the overall return of a bond? - [ ] It has no effect on return. - [x] It determines the time frame in which interest is paid and principal is returned. - [ ] It reduces the risk associated with the bond. - [ ] It eliminates fluctuations in market value. > **Explanation:** Maturity affects a bond’s overall return by setting the timeframe within which interest is paid periodically and the principal is returned at maturity, influencing investment returns and strategies. ### Is it possible to lose investment if a bond reaches its maturity? - [ ] Yes, it's always possible to lose an investment at maturity. - [x] No, unless the issuer defaults. - [ ] Yes, all invested capital is at risk. - [ ] No, bonds are risk-free. > **Explanation:** While bond investments typically return the principal at maturity, investment loss may occur if the issuer defaults on repayment. ### Why is it important to consider a loan’s maturity date? - [ ] It ensures the borrower never needs to repay. - [ ] It determines how quickly assets can be financially liquidated. - [x] It helps in planning for repayment schedules and interest costs. - [ ] It only matters for short-term loans. > **Explanation:** A loan's maturity date helps borrowers plan for the repayment schedule and manage associated interest costs effectively. ### What is a key distinguishing factor between the maturity of residential and commercial loans? - [x] The complexity and terms can significantly differ, including amortization periods. - [ ] Both always have the same maturity periods. - [ ] Residential loans often mature sooner than commercial loans. - [ ] Maturity is only relevant for commercial properties. > **Explanation:** The terms and amortization periods for residential and commercial loans can differ significantly. Typically, different market conditions apply and influence the maturity scheduling physically and financially for borrowers.