What Is the Maturity Date of a Corporate Bond?
- Almost all corporate bonds have terms of one to 30 years. Any financial instrument with a term less than one year is generally called "commercial paper." For example, if you bought a General Electric five-year bond in October 2010, it would have a term of five years and thus have a maturity date of October 2015.
- All bonds pay interest. The amount of interest is determined by the term of the bond and the risk of default. Generally speaking, the longer the term, the higher the interest, and the greater the risk, the higher the interest. So a long-term, high risk bond pays the highest interest, and a short-term, low risk bond pays the lowest interest.
- Bond rating agencies like Moody's, Fitch, and Standard and Poor's analyze the credit risk of every bond that is issued and assign it a rating (ranging from AAA to D) and these ratings along with the term of the loan is what determines the interest rate paid. Keep in mind that each rating agency has a somewhat different formula for assessing credit risk, so a bond with an AAA rating for Moody's might just be an AA rating at Fitch.
- Blue-chip bonds are bonds issued by large companies with excellent finances (GE, Procter & Gamble and the like) and are considered very low risk and usually rated AAA or AA. Blue-chip bonds generally pay lower interest rates. Junk bonds (or high-yield) bonds are on the opposite end of the spectrum. These are considered relatively high risk non-investment grade bonds and are usually rated BB, BA or below. Junk bonds pay higher interest rates.
- Some bonds, particularly blue-chip corporate bonds, are callable bonds, which means that they can be "called in" before they reach their maturity date. Investors are paid the set interest rate until the calling date and have all of their principal returned, but they then must find another place to reinvest those funds. Companies do this to protect themselves from big changes in interest rate environments, i.e., that they do not get stuck paying high interest rates to long-term bond-holders when they can meet their financing needs through other means at significantly lower rates.
