Investing in fixed-income securities is a popular strategy for many investors looking for stable returns and consistent income. One important aspect of fixed-income investing is understanding the concept of current maturity.
In this article, we will explore the definition and importance of current maturity in fixed-income investing, as well as the different types of maturities for bonds. We will also delve into the concept of current maturity in the context of corporate long-term debt and its impact on loan covenants.
Current Maturity in Fixed-Income Investing
Fixed-income investing refers to investing in securities that provide regular fixed payments over a specific period of time. The maturity date of a fixed-income security is an important factor in valuing the bond.
Current maturity, on the other hand, refers to the remaining time until the bond reaches its maturity date.
Definition and Importance
Current maturity is the time left until a bond reaches its maturity date. It is a crucial aspect of fixed-income investing as it helps investors determine the market value of the bond and make informed investment decisions.
By knowing the current maturity, investors can assess their risk appetite and align it with their investment strategy. Valuing bonds with short current maturities is relatively straightforward.
The market price of a bond with a current maturity of one year or less is usually very close to its face value. However, for bonds with longer current maturities, the market price may deviate significantly from the face value, depending on prevailing interest rates and market conditions.
This is because longer current maturities expose investors to increased interest rate risk.
Types of Maturities for Bonds
Bonds can have different maturities, such as original maturity and current maturity. The original maturity refers to the time from issuance to maturity, while the current maturity focuses on the remaining time until maturity.
The difference between these two maturities is due to the fact that bonds can be bought and sold in the secondary market. Accrual bonds, also known as amortizing bonds, have periodic principal payments that reduce the bond’s face value over time.
These bonds have an original maturity, which is the time it takes for the bond’s face value to be fully repaid. However, their current maturity can be shorter than the original maturity, especially when interest rates are low.
Zero-coupon bonds, on the other hand, do not have coupon payments and are sold at a discount to their face value. The original maturity of a zero-coupon bond is typically equal to its current maturity, as there are no periodic payments involved.
The value of zero-coupon bonds tends to fluctuate more with changes in interest rates compared to bonds with coupon payments.
Current Maturity of Corporate Long-Term Debt
In addition to individual bonds, current maturity is also relevant in the context of corporate long-term debt.
Definition and Calculation
Corporate long-term debt refers to the portion of a company’s liabilities that extend beyond one year. The current maturity of corporate long-term debt represents the portion that will mature within the next 12 months.
It is an important figure for investors and creditors as it helps assess a company’s ability to meet its short-term obligations. To calculate the current maturity of long-term debt, one can examine the balance sheet of a company.
Look for the long-term debt portion of the liabilities and identify the portion that will become due within the next 12 months. This figure represents the current maturity of the long-term debt.
Impact of Default on Loan Covenant
A loan covenant is a contractual agreement between a borrower and a lender that sets certain conditions and requirements for the borrower. Defaulting on a loan covenant can have serious repercussions for the borrower, including potential acceleration of loan repayment, additional fees, or even legal action by the lender.
When a company defaults on a loan covenant, it may trigger a default not only on the short-term loan but also on the long-term debt. This can lead to financial instability and difficulties in meeting future obligations.
Conclusion:
Understanding current maturity is essential for fixed-income investors as it helps evaluate the market value of bonds and make informed investment decisions. Different types of maturities exist for bonds, such as original maturity and current maturity, each with its own implications for valuation.
In addition, the current maturity of corporate long-term debt plays a crucial role in assessing a company’s short-term financial obligations and potential impact on loan covenants. By gaining a comprehensive understanding of current maturity in fixed-income investing and corporate debt, investors can make better-informed decisions and mitigate potential risks.