Average Effective Maturity
When do the bonds mature in a given portfolio of bonds? Some come due in five years; some in 10; some in 30; some in 18 months...so what's the average? And why would we care?
Well, the more long-dated the bonds, the more volatile they will be as interest rates shift around. Like if a bond coming due pays 5% interest and suddenly the Fed, panicking that inflation is eight minutes away, raises rates 300 basis points and indicates 500 points soon...then bond prices of equivalent risk might rocket to yield 10%. At that point, your lousy little five-percenter looks terrible.
The good news? It comes due and pays cash in just six months, so the damage should be minimal. After six months of suffering, you have your cash back and can do whatever you want with it. But if you have a 30-year duration or effective maturity bond, then...um...ouch. Not the 50 Shades kind, either. You'll have to suffer an interminably long time before you feel good about your paltry 5% yield in a 10% world.
Related or Semi-related Video
Finance: What is the Maturity of a Bond?95 Views
finance a la shmoop what is the maturity of a bond ?oh come on.
doorbell bash, and prank phone calls whoopee cushions for the teacher? like how mature [person rings door bell]
is that ? right well a bond matures when it comes due. that is a company borrows a
hundred million bucks in 2019 for ten years paying five percent interest or
five million dollars a year to rent that money along the way, and then 2029 comes
around and well the bond matures. and lenders have that hundred million [bond is stamped]
dollars to the company get how much well if the company pays off its bond like it
promised then that last year 2029 the lenders get a hundred five million
dollars in that final year -that is they get the five million bucks in interest
or rent on the money that year and then they get their original principal back.
just like the person who borrowed it promised what happened that is the bond
will have matured. so goodbye whoopee cushions, and late night parties in hello
NPR in a responsible bedtime. [girl snores ]
Up Next
Term to maturity is kind of the life cycle of a bond, but luckily for the bond, it gets to skip puberty.
What are high yield/junk bonds? Junk bonds are called junk for a reason. They are really risky, but because of this risk, they can pay very well. T...
What are T-Notes, T-Bonds, and TIPS? T-Notes are debt securities (like bonds) that are issued by the government and mature within one to 10 years....
The inverse relationship refers to the fact that as interest rates go up, bond prices go down, and vice-versa. Bottom line reason is supply and dem...