For bonds or loans, the maturity date is defined as the date when a final payment of the bond or loan is paid.
This is also defined as the date when all of the principal plus interest is paid. There are a multitude of maturity-type bonds and a multitude of maturity dates.
The government bonds, corporate bonds, green bonds, ESG bonds every type of bond and loan does not necessarily have a maturing date. In recent years, perpetual bonds have also been issued by governments and corporations.
The perpetual bonds do not have any maturing date and these never pay back the principal, but they pay a fixed interest payment which may be paid monthly, bi-monthly, or quarterly, or annually.
For example, the Japanese Conglomerate Softbank issued a perpetual bond in recent years. Softbank can buy back the perpetual bond by paying the principal back to the bondholder.
What does it means for the loans and bonds you are holding?
The maturity dates for loan issuance are lengthening as the real interest rates are continuously falling, especially in the developed world.
Both Corporations and governments are issuing an ever-increasing number of bonds with maturity dates lasting for decades and even a century.
The lower interest rates environment is being taken advantage of by borrowers to lock in low-interest rates for a longer time.
The longer maturity date means that you would be getting paid longer, but overall you would be getting paid less.
The shorter maturity date means that you would be getting paid more, but for a shorter timeline. After the maturity date is reached, that bond or loan expires.
And if you are borrowing a loan, like a mortgage, the maturity date means the last time you would be paying that loan. It means you have paid the principal and the interest payment.
Types of Maturity dates based on the type of bonds and loans
The maturity dates are based on the type of bond. The longer bonds have longer maturity dates and shorter bonds have shorter maturity dates.
The four main types of bond maturities are shown in figure 1 below:
Figure 1: Main types of Maturity dates
There are four main types of maturity dates associated with bonds and loans. These four types are short-term bonds, long-term bonds, perpetual bonds, and century-long bonds. The details of these bonds are given below:
Short term maturity dates
The short-term maturity dates are associated with short-term loans and bonds. The maturity dates can be anywhere between six months to two years.
As these bonds have short-term maturity, so the interest payment on these loans and bonds is also very low as compared to long-term loans. But, the principal is paid quickly as compared to the longer-term bonds.
These bonds are mainly issued by a corporate when it is trying to tide over a financial issue or any other problem where it needs to hold cash. Covid-19 is such an issue.
For example, when every Government in the world issued a lockdown, Carnival Cruises almost went bankrupt. So, they borrowed on short term to tide over the Covid-19.
Similarly, Covid-19 also forced General Motors to borrow a short-term loan at an annualized interest rate of ten percent.
Long term maturity dates
The long-term maturity dates are associated with long-term loans and bonds. These bonds have long-term maturity and so they pay more interest over time even at lower interest rates.
The principal payment stays the same. The long term bonds have a timeline of anywhere between five to fifty years.
Thirty years was considered the longest bond issuable, and mainly governments issued thirty years bonds, but now governments are issuing fifty years bonds and even corporations are issuing long term bonds.
Long-term bonds and loans are usually issued when a corporation is thinking of making an investment. For example, a Car company may issue a fifteen-year bond to build a car factory.
For you, the longer maturity dates mean that you would be paid overall more interest while the principal stays the same.
The perpetual bonds while not new have been rarely used. First, only governments issued these bonds, but now even corporations have started issuing these bonds.
The big difference between perpetual bonds and other types of bonds is that the issuer never has to pay back the principal.
There is an option in the legal document of the perpetual bond that the issuer can buy back the bond by paying back the principal, but the issuer is under no obligation to do so.
What it means to you as a perpetual bondholder is that you would get an interest rate payment in perpetuity. But, you would never get back the principal unless the issuer decides to do so.
The perpetual never reaches the maturity date. Recently, Softbank, a Japanese corporation, and also, Canada, has issued perpetual bonds.
A century bond is a long-term bond. But, it is extremely new. Only Governments have so far been the main issuer of the century bond. Century bonds pay the most interest payment while also paying back the principle.
The governments have been mainly issuing Century bonds to take advantage of historically low interest rates. The government wants to lock in the lower interest rates. So, they are issuing bonds with long-term maturity.
What it means for you is that if you are holding a century bond, you would be paid more interest over the timeline of the bond and also gets back the principal, unlike the perpetual bond.
Both the governments and corporations have been issuing longer and longer maturity bonds, as the interest rates have touched historically low. The government and corporations have been locking in the record low-interest rates.
This also means that if you are investing in bonds you would be paid lower interest over a bond’s life time.