What is Maturity? (Plain English Definition)
Definition: Maturity is the date on which a bond's principal is repaid to the investor and interest payments cease.
Maturity Explained Simply
Maturity refers to the date when a bond's life ends and the issuer repays the face value (principal) to the bondholder. Until that date, the bondholder receives periodic interest payments. After maturity, the bond ceases to exist. Bonds are classified by their maturity length: short-term (1-3 years), intermediate-term (3-10 years), and long-term (10-30 years or more).
Maturity is closely related to a bond's risk characteristics. Longer-maturity bonds are more sensitive to interest rate changes because investors are locked into the current rate for a longer period. If rates rise, a 30-year bond loses much more value than a 2-year bond because the 30-year bond holder misses out on higher rates for a much longer time.
Bond ETFs do not have a single maturity date because they hold many bonds maturing at different times. Instead, they report an average or weighted average maturity. As individual bonds mature, the ETF reinvests the proceeds into new bonds, maintaining its target maturity range. Some newer bond ETFs, called defined-maturity ETFs, hold bonds that all mature in the same year, behaving more like individual bonds.
Maturity Example
A short-term bond ETF like the Vanguard Short-Term Bond ETF (BSV) holds bonds with an average maturity of about 2.9 years. A long-term bond ETF like the Vanguard Long-Term Bond ETF (BLV) holds bonds with an average maturity of about 24 years. When rates rose sharply in 2022, BSV fell about 5% while BLV fell over 25%. The longer maturity made BLV much more sensitive to the rate increase.
Why Maturity Matters for ETF Investors
Maturity is a key factor in selecting bond ETFs because it directly determines how much interest rate risk you are taking. For money you might need in the next few years, short-maturity bond ETFs provide stability. For money you will not touch for a decade, longer-maturity bonds offer higher yields and can benefit from eventual rate declines. For ETF investors, matching bond maturity to your investment timeline is a prudent approach. If you are saving for a down payment in 3 years, a short-term bond ETF minimizes the risk of losing principal. If you are building a retirement portfolio decades away, intermediate and long-term bond ETFs provide higher yields that compound over time, and you can ride out any interim price declines.
Maturity vs Duration
| Maturity | Duration |
|---|---|
| Maturity is the date on which a bond's principal is repaid to the investor and interest payments cease. | See full definition of Duration |
While maturity and duration are related concepts, they serve different purposes in the world of ETF investing. Understanding both terms helps you make more informed decisions about which funds to include in your portfolio and how to evaluate their performance.
Related Terms
Deepen your understanding of ETF investing by exploring these related concepts:
Duration
Duration measures a bond or bond fund's sensitivity to interest rate changes, expressed in years -- the higher the duration, the more the price moves when rates change.
Bond
A bond is a fixed-income investment where you lend money to a government or corporation in exchange for regular interest payments and the return of principal at maturity.
Interest Rate
An interest rate is the cost of borrowing money or the return earned on lending money, expressed as a percentage of the principal amount.
Yield to Maturity (YTM)
Yield to maturity is the total return anticipated on a bond if held until it matures, accounting for coupon payments, current price, and the face value received at maturity.
Coupon Rate
The coupon rate is the annual interest rate paid by a bond, expressed as a percentage of the bond's face value.
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