Key Takeaways
- Current maturity refers to the time remaining until a bond’s maturity date, critical for bond valuation.
- It is particularly relevant for investors buying bonds on the secondary market to assess investment value.
- Current maturity can also describe the part of a company’s long-term debt due within 12 months.
- Knowing different maturities helps investors manage and assess their portfolios effectively.
What Is Current Maturity?
Current maturity is the remaining time until a bond or a financial obligation reaches its end date, or maturity date, when the principal amount is repaid to the bondholder. Knowing the current maturity is crucial for investors to accurately assess a bond’s value and expected return. In this guide, we will explore how current maturity impacts bond valuation, examples of its application, and how it differs from the original maturity. Understanding current maturity helps investors make informed decisions by evaluating the time frame they have for receiving interest payments and principal repayment, allowing them to compare bonds effectively.
How Current Maturity Impacts Bond Valuation
Essentially, the current maturity tells how long the bond has left until maturity. The primary features of a bond include the coupon rate, par value, and maturity.
The maturity date is the date on which the issuer repays the bondholders the principal investment and the final coupon due. For accrual bonds and zero-coupon bonds, the maturity date is the day when bond investors receive the principal plus any accrued interest on the bond.
There are different types of maturities that investors use when referring to bonds. The “original maturity” is the time between the issue date and the maturity date. This date is included in a bond’s indenture at the time of issuance. An investor that purchases a bond on its issuance date will be quoted the original maturity. The current maturity is how much time is left before the bond matures and is retired from the market. Investors who purchase bonds on the secondary market, often weeks or months after their original issuance, will use the current maturity for valuing fixed-income securities.
The longer the time until maturity, the more interest payments that can be expected. In a normal company, there could be several bonds with staggered current maturities resulting in bonds expiring at different times.
Current Maturity Calculation Example
For example, let’s assume an investor purchases a bond in 2020. The bond was originally issued in 2010 with a maturity date in 2030. The current maturity of the bond is 10 years, calculated as the time difference between 2020 and 2030, although the original maturity is 20 years. As the years go by, the current maturity will decrease until it becomes zero on the maturity date. For instance, in 2025, the current maturity will be five years.
Examining Current Maturity in Corporate Debt
The current maturity of a company’s long-term debt refers to the portion of liabilities that are due within the next 12 months. As this portion of outstanding debt comes due for payment within the year, it is removed from the long-term liabilities account and recognized as a current liability on a company’s balance sheet. Any amount to be repaid after 12 months is kept as a long-term liability.
For example, assume a company has a $120,000 outstanding debt to be paid off in $20,000 installments over the next six years. This means that $20,000 will be recognized as the current portion of long-term debt to be repaid this year, while $100,000 will be recorded as a long-term liability. It is possible for all of a company’s long-term debt to suddenly be classified as debt with a current maturity if the firm is in default on a loan covenant. In this case, the loan terms usually state that the entire loan is payable at once in the event of a covenant default, which makes it a short-term loan.