What it means
When money is placed in a fixed-term product, such as a certificate of deposit or a note, the question is simple: how much will I get back at the end? Maturity value answers it.
It adds the interest to the original amount, which is the principal. The calculation depends on how interest works.
With simple interest, only the original principal earns interest, so the maturity value grows in a straight line. With compound interest, earlier interest also earns interest, so the maturity value grows faster, and the more often interest is added, the larger the result.
For a bond, the maturity value is usually its face value, also called par value, which is repaid on the maturity date along with the final coupon. The coupons paid along the way are separate cash flows.
This differs from a zero-coupon bond, where there are no regular payments and the whole return arrives as the gap between the purchase price and the maturity value. Businesses use the concept in treasury management, when deciding where to place surplus cash and when planning for debt repayments.
A company with a $1,000,000 note due in two years needs to know the exact maturity value so it can set aside enough cash. Lenders use it to check that borrowers can meet the final payment.
The maturity value is a promised amount, not a guaranteed one. It depends on the issuer or bank meeting its obligation, and in products with variable rates it can only be estimated.
Taxes and fees may also reduce the amount the holder keeps. It helps to separate maturity value from market value.
The market value of a bond or note can rise and fall before the due date as interest rates change, but the maturity value stays fixed in the contract. A holder who keeps the instrument to the end receives the maturity value regardless of what happened in between, provided the issuer pays.
In practice
Real-world examples
Example 1
A company buys a 12-month certificate of deposit for $200,000 at an agreed interest rate. At the end of the year the bank pays the principal plus interest, and the treasurer schedules the cash for a supplier payment due the same week. The maturity value was fixed in advance.
Example 2
A small business issues a $50,000 promissory note to a supplier with 8% simple interest and a 6-month term. The maturity value is 50,000 x (1 + 0.08 x 0.5) = 50,000 x 1.04 = $52,000. The finance team records the interest as it accrues.
Example 3
An investor buys a bond with a face value of $1,000. Whatever price she paid in the market, the bond will repay $1,000 at maturity, and that is its maturity value. She compares this with the price paid to work out her return.
Think of it
Think of maturity value like baking a loaf of bread. You put in the raw ingredients, let them rise and bake in the oven for a set time, and the final product that comes out is the complete, finished loaf.
Formula
Calculation
Maturity value (compound interest) = Principal x (1 + r / n) ^ (n x t)
Maturity value (simple interest) = Principal x (1 + r x t)
Suppose a business deposits $10,000 for 3 years at 5% a year, compounded annually, so n = 1. Maturity value = 10,000 x (1.05)^3 = 10,000 x 1.157625 = $11,576.25. The interest earned is 11,576.25 - 10,000 = $1,576.25. With simple interest, the maturity value would be 10,000 x (1 + 0.05 x 3) = 10,000 x 1.15 = $11,500, which is $76.25 lower.Case study
Seen in the real world
Oakmont Logistics is an illustrative, fictional freight company that set aside $400,000 in a two-year fixed deposit at 4% compounded annually to pay for a new warehouse roof. The facilities manager's quote for the work was $430,000, and the finance director wanted to know whether the deposit would cover it.
The maturity value was 400,000 x 1.04 x 1.04 = 400,000 x 1.0816 = $432,640. That left a margin of 432,640 - 430,000 = $2,640 above the quote. The finance director decided the margin was too thin to cover possible price increases and added a further $15,000 from operating cash.
The illustrative lesson is that calculating maturity value before committing is a simple check, and that building in a buffer protects against costs that move.
Watch out
Common mistakes
- Using simple interest when the product compounds, which understates the amount that will be received.
- Confusing the maturity value of a bond with its market price, which changes daily until the bond matures.
- Forgetting that tax and fees can reduce the net amount the holder receives.
Questions
People also ask
Is maturity value the same as face value?
For a standard bond, yes, because it repays its face value at maturity, but for a deposit or loan the maturity value includes accumulated interest on top of the principal.
How does compounding frequency change maturity value?
More frequent compounding adds interest to the balance sooner, so the maturity value is slightly higher for the same stated rate.
Can maturity value be less than the amount invested?
Yes, if the issuer defaults, if fees exceed the interest earned, or if the product is linked to a market and loses value, although fixed deposits and most government bonds are designed to return at least the principal.