Tavagapedia

Maturity



Key Takeaways

  1. Maturity is the date on which the life of a financial instrument ends.
  2. The actions that can be performed after the maturity date are renewal or withdrawal of the instrument.




Maturity is the date on which the validity of a financial instrument ends. The end could trigger a repayment, redemption, withdrawal, renewal, or the end of a contract, depending on the financial instrument.

About Maturity

The dictionary definition of maturity is “the state, fact or period of being mature,” but in terms of insurance/security, etc. means “having a fixed date. “

Maturity is the date on which the life of a financial instrument ends. The actions that can be performed after the maturity date are renewal or withdrawal of the tool. The term maturity is commonly used for

  1. Deposits
  2. Foreign exchange
  3. Spot and forward transactions
  4. Interest rate and commodity swaps
  5. Options
  6. Loans
  7. Fixed income instruments e.g., bonds

Let us understand a few of the maturity in terms of specific instruments unheard of previously

Maturity of a bond

At the maturity of a bond, the borrower has to give back the outstanding amount i.e., the amount borrowed (principal) + promised / applicable interest.

Maturity of a derivative

For derivative instruments like options and warrants, the term maturity can be used, but it is important that one must distinguish between the expiration date and the maturity date. The expiration date is either the last day or only day on which the instrument can be exercised. In contrast, the maturity date is the day on which the underlying transaction settles when an instrument is applied.

Maturity of the foreign exchange

It has the same concept as a derivative instrument. The maturity of the foreign exchange transition is the date on which the transaction settles.

Maturity of a deposit

It is the date on which the principal is returned back to the investor. Along with the principal, the investor may receive interest. This interest can be periodic or one time fixed at maturity. The most common deposit instrument to use maturity as a term to describe the end date is a Fixed deposit.

For example: let us say that Mr. A has brought a bond from the company XYZ stating that at the end of the ten years he will receive 100% of the amount stated in the bond which Mr. X bought at a discount of 5 % i.e., he paid only 95% of the face value of the bond. Now he may choose to preserve the bond or sell the bond than at the maturity date i.e10years from the issuing date, the bondholder/ owner may choose to cash out the bond and receive the full face value of the bond.