Understanding Bond Term to Maturity: Definitions and Key Examples

What Is Term to Maturity?

A bond's term to maturity is the period during which investors earn interest before the issuer repays the principal at maturity. Terms vary (short-, intermediate, or long-term), and may be affected by call or put provisions. For example, Disney's long-term bonds show how extended maturities can offer higher yields but greater interest rate risk.

How Term to Maturity Affects Bond Pricing and Interest Rates

Generally, longer terms to maturity lead to higher interest rates and less price volatility in the secondary bond market. Also, the further a bond is from its maturity date, the larger the difference between its purchase price and its redemption value, which is also referred to as its principal, par, or face value.

Other factors, such as the issuer's creditworthiness, can also affect the difference between a bond's price and its par value. Other factors include whether or not the bond is "callable."

Navigating Interest Rate Risk in Bonds

The interest rate on long-term bonds is higher to compensate for the interest rate risk the investor is taking on. The investor is locking in money for the long run, with the risk of missing out on a better return if interest rates go higher. The investor will be forced to forego the higher return or sell the bond at a loss in order to reinvest the money at a higher rate.

A short-term bond pays relatively less interest but the investor gains flexibility. The money will be repaid in a year or less and can be invested at a new, higher, rate of return.

In the secondary market, a bond's value is based on its remaining yield to maturity as well as its face, or par, value.

Factors That Alter Bond Term to Maturity

For many bonds, the term to maturity is fixed. However, the term to maturity can be changed if the bond has a call provision, a put provision, or a conversion provision:

• A call provision allows a company to pay off a bond before its term of maturity ends. A company might do this if interest rates decline, making it advantageous to pay off the old bonds and issue a new one at a lower rate of return.
• A put provision lets the owner sell the bond back at face value, often to free up funds for other investments.
• A conversion provision allows the owner of a bond to convert it into shares of stock in the company.

Real-World Example: Disney's Bond Issuance and Term Maturity

The Walt Disney Company raised $7 billion by selling bonds in September 2019.

The company issued new bonds with six terms of maturity in short-term, medium-term, and long-term versions. The long-term version was a 30-year bond that pays 0.95% more than the comparable Treasury bonds.

The Bottom Line

A bond's term to maturity determines when investors receive interest and the principal repayment, shaping both yield and risk. Bonds are classified as short-, intermediate-, or long-term, with longer maturities generally offering higher rates to offset interest rate risk.

In the secondary market, remaining term affects pricing and yield calculations, while features like calls or puts can change maturity dates. For instance, Disney's varying bond terms show how issuers tailor maturities to meet different investor needs.

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