What is the maturity of a bond?
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What is the maturity of a bond?
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David John Marotta
President, Marotta Wealth Management, Inc., Marotta Wealth Management, Inc.
434-244-0000
questions@emarotta.com
David John Marotta is the President of Marotta Wealth Management, a fee-only financial planning and asset management firm in Charlottesville, Virginia. He is an oft-quoted writer and speaker on financial matters and his weekly financial column can be found at www.eMarotta.com
What is the maturity of a bond?
Host: What is the maturity of a bond?
David Marotta: A bond's maturity is the number of years until the bond pays back its principal. So, a 10-year bond will pay back its principal in 10 years. There is another measure of how long a bond is and that's called duration and duration takes into account not only the 10 years it takes the bond to pay back, but all of the interest rates in between, all of the interest payments.
Transcripts
Host: What is the maturity of a bond?
David Marotta: A bond's maturity is the number of years until the bond pays back its principal. So, a 10-year bond will pay back its principal in 10 years. There is another measure of how long a bond is and that's called duration and duration takes into account not only the 10 years it takes the bond to pay back, but all of the interest rates in between, all of the interest payments. And so a 10-year bond will have a 10-year maturity but will have a slightly shorter duration because it is a weighted average of all the payments including the last payment where it pays back its principal. Given two bonds with equal maturity, they are both at 10 years, the one that has the higher interest rate payments will tend to pull down the duration and so it will have a slightly shorter duration. Bonds fluctuate based upon interest rate movements and the longer the bond is, the more it will fluctuate. So, a 30-year bond will fluctuate much more than a 10-year bond and a 10-year bond will fluctuate in price much more than a 5-year bond.
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