What is Maturity Value?
Maturity value is the value of a fixed-term security at the end of the term, when the security is said to be “matured.” When the holder of the security redeems the matured security, she will receive the maturity value in cash or another form of compensation by arrangement. There are a number of ways to determine this value, depending on the type of security involved.
A common example of a fixed-term security is a bond. For bonds, the maturity value is the par value, also known as the face value, which is the amount that the bond is issued in. People who invest in bonds buy them when they are released, receive interest payments at set intervals over the lifetime of the bond, and can redeem them at the end of the term for their face value. Some investors opt to sell their bonds or are forced to because they need liquidity and cannot have funds locked up in fixed-term investments.
Certificates of deposit (CD) are another example of a fixed-term investment with a maturity value. In the case of a CD, the maturity value is determined by how much money is deposited into the CD and how much interest accrues. Because the interest is compounded by adding it to the initial balance, each year the CD earns more money. There are calculators available online that people can use to find the maturity value of a CD. These tools usually assume that people are not withdrawing money early. Early withdrawal results in penalties and also lowers the amount of interest payments because the CD has less money in it.
Savings bonds, certain types of annuities, and other fixed-term investments all have a maturity value. When people purchase such investments, they are either provided with a statement of the estimated value at maturity or with information that can be used to calculate it. For example, when a person buys a CD, he is provided with a locked-in interest rate that they can use to find the maturity value.
Such investments have advantages because they generate steady rates of return along with having very predictable maturity values. This can be reassuring to conservative investors. However, they are also highly illiquid. This can pose a problem for people who need cash. While these investments can be sold or broken up early, people will pay penalties. It is advisable to consider whether the funds being invested might be needed before the maturity date.
@miriam98 - Actually stocks are not for everybody. You can lose your shirt in the stock market. Trust me, I’ve lost buckets of money, and my 401k is now a 201k.
There is no sure thing in life. If you’re not comfortable playing the market just put your money in CDs or a solid government bond that will pay a fixed rate of maturity. At least you will be able to sleep at night.
@SkyWhisperer - It’s fairly easy to calculate maturity value returns on a CD. The reason is that it seems to be a straight line calculation, which is why you don’t get a lot of money from certificates of deposit.
Mortgage interest rates are another story, which is why that calculation makes you pay for your mortgage several times over in interest payments. I’ve never advised people to buy CDs except in situations where they needed a temporary place to park their cash. The rate of return just isn’t worth it in my opinion.
If you are nearing retirement they may be okay, but if you are still young and have many years ahead of you, the best thing is to invest in stocks. Buy CDs later.
I think it’s a good idea, when your kids are born, to buy savings bonds in their names. The savings bond maturity value might seem nominal but over the course of twenty or thirty years it can be a worthwhile investment.
You can give it to your kids when they are ready to enter into college and they can use it to fund their tuition. Or you can give it to them later in life.
It’s their money and they can use it as they wish. Some people prefer to invest in mutual funds as part of college tuition plans but personally, I would advise against it. I think stocks are more risky. For college tuition you want something that is stable and secure over the life of the investment.
Post your comments