What is the maturity of a bond?
The maturity of a bond is the date of the final payment due from the issuer and is an important protection for bond holders.
Bond holders, unlike shareholders, do not have voting rights and cannot influence the strategic direction of the issuer. If an issuer changes strategy in a way that is damaging to bond holders, then the existence of a maturity date means that the company must take steps to ensure it can repay bond holders’ invested capital.
Bonds are issued with different maturity dates for the following reasons:
- Investor appetite: The market will only lend for long periods if it has confidence in the issuer’s credit quality. A low credit quality at the point of issue, perhaps because of uncertainty about long term cash flows, is likely to mean that the issuer can only borrow for shorter periods.
- Issuer appetite: All issuers of bonds should weigh the long term and short term costs of financing against their expected business cash flows. A company that issues a long-term bonds has greater certainty over financing costs but lower flexibility to adjust cash flows if the business outlook changes. A company that issues short term bonds has greater flexibility to adjust cash flows if the business outlook changes but is vulnerable to unexpected increases in financing costs. Therefore, issuers normally set maturities that balance flexibility and financing costs.
The maturity date of a bond is therefore influenced by both aspects described above.