Investing in debt securities — Maturity

ONE of the key important issues to consider when investing in debt securities is maturity. Maturity is the period from issue date until the final contractually scheduled payment date. It is therefore the period at the end of which the contractual agreement between the issuer and the debt securities holder (investor) expires.

The expiry date, also known as the maturity date, is the final date when all outstanding payment obligations (the principal amount of a security and any outstanding interest payments) become due to the investor.

Once all due payments have been made, the issuer has no further obligations to the investor.

One can invest in short, medium or long term debt securities.

Debt securities with maturities of less than 1 year are short-term securities classified under money market instruments.

Those with maturities of 1 to 5 years are classified under medium-term debt securities. Debt securities with maturity profiles beyond 5 years are considered to be long-term. A short-term debt security is relatively more stable and therefore safer than a long-term debt security.

However, short-term debt securities typically attract lower rates of returns. Investors who do not want to tie up their money for long periods of time can therefore invest in short-term debt securities.

Alternatively, investors seeking greater overall returns can invest in long-term securities despite the higher risk associated with greater interest rate fluctuations.

An investor’s choice on maturity is based on his / her investment horizon. Investment horizon is the total length of time that an investor expects to hold the debt security. The choice of maturity thus depends on one’s ◆ Financial objectives ◆ Needs and ◆ Risk tolerance Investments in debt securities can preserve value for one to meet long-term financial obligations like college fees and retirement income.

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