Meaning of maturity
Maturity, basically, refers to the length of time by which the principal amount of a bond should be paid off. In simple words, it can be explained as the end of a security’s life. The Investopedia explains maturity as the date by which the borrower is supposed to pay back the amount borrowed by him through the issue of a bond.
What is maturity matching?
In asset management, maturity matching refers to the co-ordination of cash inflows and outflows of an organization by matching the maturity of income generating assets, like deposit certificates, with the maturity of interest incurring liabilities (debts).
What is maturity value?
The amount received at the time when security is redeemed at maturity, is referred as maturity value. For the majority of securities, maturity value is equal to par value. The interest is paid off to te owner rather than being added on to the principal.
How to calculate maturity value?
The steps to be followed in calculating the maturity value are as follows:
1. Evaluate the amount of interest added at every compounding interval, also referred as periodic rate. As and when the interest accumulates on a debit security, it is added at periodic intervals. This added money then starts to earn more interest thereby compounding the earnings. To determine the periodic rate, the annual interest rate is divided by the number of times every year the interest is evaluated and added.
2. Evaluate the interest added for the first time interval. This is done by multiplying the periodic interest rate with the starting value of the debt security.
3. The interest is then added to the value of debt security to evaluate the ending value of the period.
4. Thereafter, a formula is used to evaluate the maturity value. The principle used to evaluate the maturity value is illustrated in step 2 &3, but it is a tactless and error-prone way of doing it. The formula is:
V = P x (1 + r)n
V is the maturity value,
P is the principal, andn refers to the number of compounding intervals from the time when maturity is issued.