What it means
Every bond has a maturity date, the day the issuer repays the face value. Term to maturity is simply the gap between now and that date, and it is usually quoted in years.
Investors sort bonds by this measure because it drives so much else. Short-dated paper with under three years to run behaves almost like cash, while paper with twenty years left swings substantially in value as yields move.
The relationship works because a bond's price is the present value of its future payments. When market yields rise, every future payment is discounted more heavily, and a bond with more payments still to come loses proportionally more value.
Corporate treasurers use the same idea in reverse. Issuing debt with a long term to maturity locks in today's rate and removes refinancing risk, at the cost of whatever premium the market charges for that certainty.
The phrase is also used loosely for loans and leases, where it means the remaining contractual life. On a balance sheet this drives the split between current liabilities, due within a year, and non-current liabilities due later.
One nuance worth knowing is that term to maturity is not the same as duration. Duration weights every cash flow by when it arrives, so a high-coupon bond has a shorter duration than a zero-coupon bond with an identical term to maturity.
In practice
Real-world examples.
Example
A corporate treasurer reclassifies a $5 million loan from non-current to current liabilities because its term to maturity has fallen below twelve months. The reclassification worsens the current ratio and prompts an early conversation with the bank.
Example
An insurance company buying bonds to back 15-year annuity obligations deliberately targets a similar term to maturity on the assets. Matching the two reduces the risk that a rate move hits assets and liabilities by very different amounts.
Example
A treasury team holding $4 million of 20-year government bonds sees the market yield rise by 1 percentage point and the holding lose roughly 12% of its value, about $480,000 on paper. Because the bonds will be held to maturity the cash return is unaffected, but the reported valuation takes the hit.
Formula
Calculation
Term to maturity = maturity date minus today's date. Its effect on price shows up in the pricing formula: price = each coupon discounted at the market yield, plus the face value discounted over the full remaining term.
Consider a $1,000 face value bond paying a 5% annual coupon of $50, with exactly 4 years of term to maturity, when the market yield is 6%.
The face value is worth $1,000 / (1.06)^4 = $1,000 / 1.262477 = $792.09 today. The four coupons are worth $50 x (1 - 0.792094) / 0.06 = $50 x 3.465106 = $173.26.
The bond's price is $792.09 + $173.26 = $965.35, a discount to face value because the 5% coupon sits below the 6% yield available elsewhere. If the same bond had 10 years to maturity instead of 4, its price would be $926.40, showing how a longer term to maturity amplifies the effect of the same 1 percentage point yield gap.Case study
Seen in the real world.
The following is an illustrative and fictional scenario. Kestrel Mutual, an invented small insurer, held an $80 million bond portfolio with an average term to maturity of 11 years, backing claim obligations that averaged just 4 years.
When yields rose by 2 percentage points, the portfolio's market value fell by about 16%, or $12.8 million, while the liabilities it was meant to fund fell in value by only about 7%. The reported surplus dropped sharply even though no claim experience had changed.
Kestrel's problem was never the credit quality of the bonds; it was that its assets had nearly triple the term to maturity of the obligations behind them. Rebalancing towards an average term to maturity of about 5 years cut the sensitivity by more than half, and the illustrative lesson is that term to maturity is a matching decision, not just a yield decision.
Watch out
Common mistakes.
- Confusing term to maturity with duration, and therefore misjudging how much a high-coupon bond's price will actually move.
- Quoting the original term of a bond rather than the time still remaining, which overstates how long the money is committed.
- Ignoring the balance sheet effect when a long-term loan crosses the twelve-month line and becomes a current liability.
Questions
People also ask.
What is the difference between term to maturity and tenor?
They mean much the same thing in everyday use; tenor is the more common word in bank lending and term to maturity in bond markets.
Does term to maturity affect a bond's yield?
Yes, indirectly; the yield curve usually prices longer maturities above shorter ones to compensate investors for tying money up and for greater uncertainty.
Can term to maturity change?
The stated date normally cannot, but a callable bond lets the issuer repay early, which effectively shortens the term to maturity when rates fall.
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