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What Is Term To Maturity?

What Are Short Term Bonds?

What Are Intermediate Term Bonds?

What Are Long Term Bonds?

What One Is Best For Me?

What Are The Pros And Cons OF Each?

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What is Term to Maturity?

Term to maturity is a phrase that is widely used in the financial services industry. In this sense, the word ‘term’ refers to a length of time. As such, you can think of term to maturity as being nothing more complex than the amount of time that has to pass until a financial product reaches maturation.

Although term to maturity might be used to refer to a debt instrument, it is much more common that the phrase is used in the context of bond investments. All of these sorts of investments – from short term bonds to intermediate term bonds and through to long term bonds – have a fixed amount of time that the investment must be held for in order to receive the agreed return.

Bond Term Lengths

Anything from a 1 year bond to much longer, 30 year bonds are available to investors and their rates of return usually reflect the length of time you are willing to tie your capital up for.

Property bonds, which are often issued by housing developers and other sorts of businesses in the construction industry, provide all sorts of investment lengths that frequently range from 2 years bonds right through to intermediate-term bonds which can last for as long as 10 years, depending on the size of the development.

Term Length Is A Key Consideration

As such, term to maturity is a key consideration for investors when deciding whether or not to take out a bonded investment. Simply put, if you don’t know the length of the term you are expected to have your money tied up before you can liquefy your investment, then it is impossible to compare two or more types of bond.

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How Term To Maturity Works

It is important to note that the given term to maturity, whether it is for short term bonds or long term bonds, does not alter after an investment has been made into a particular product. For example, the term until a 3 year bond would mature remains three years after the first year has passed. The term length does not reduce as time passes. In other words, term to maturity refers strictly to the amount of time between the issue date of the bond and its subsequent maturation date.

It is easily possible to work out the remaining time that any given investment has until it matures. However many investors who are interested in things like renewable energy bonds, which provide attractive investment opportunities in the biofuel and wind energy sectors, will look at the differing rates of return on various sorts of bonds.

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How Return Rates Work

A typical wind energy bond will offer a higher rate of return than you could expect of a building society savings account, for example, even if a 1 year bond were to be taken out. Most bond issuers will offer even more attractive rates of return for 3 or 4 year bonds. The reason that rates of return go up with longer terms of maturity is that the company that receives the investment has more time to make the money that it will use to pay out on the bonds it has issued and is, therefore, able to utilise its revenue stream more strategically.

Renewable Energy Bonds Terms Longer?

In the case of things like renewable energy bonds, where longer term investments are often sought, providing investors with intermediate and long term bonds is becoming more commonplace. Businesses in these markets are frequently working to establish themselves in the energy market as long-term players and, therefore, offer the sort of rates and terms to maturity that reflect this desire.

Key Points on Bonds

Before we move on to look at the various sorts of terms to maturation that are available to investors, it is worth noting a couple of things about bond investments.

Although the term to maturity is the amount of time that needs to pass in order for an investment to fully mature, many bond issuers will present coupons that represent the interest that has thus far accrued from such an investment.

Long Term Bond Coupons

In the case of a 5 year bond, for example, up to ten different coupons may be issued on a biannual basis until the final maturation date is reached. At this point, investors are often offered the opportunity to reinvest their bond in a new one or to liquefy their investment into cash.

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The Different Term Lengths

Interested in the various term types which are available to investors today and which bonds are best to invest in? If so, then read on to discover more about the maturation of short, intermediate and long term bonds.

Short Term Bonds

Short term bonds offer the shortest terms before investments will fully mature. Both 1 and 2 year bonds are common for certain government-run investment schemes but these are not always able to offer the same levels of return that you might expect of a private investment bond. On the other hand, some of the short term bonds issued by renewable energy companies are much more attractive investment products, so long as you are willing to take out anything up to a 5 year bond. Other short term investment bonds include those issued in the property development market.

Some of these will offer anything up to around 14 per cent returns per annum for terms which can be as little a three years. That is really astonishing for anyone who is used to looking at their annual percentage rate on their bank statement, for example. The reason that property developers offer bonds to ordinary investors and don’t source all of their financing from traditional sources is that there a regulatory controls which prevent banks and other investment houses from owning too great a share of any particular development.

To raise the rest of the finance that they need, developers will consequently often issue attractive short term bonds to general investors. In fact, the reason that the return on investment from such products is often so high is due to the need raise such capital quickly as well as the intrinsic growth value of the housing market today.

Who Do Short Term Investment Bonds Appeal To?

The short answer is that investments with a less lengthy term to maturity appeal to a wide range of investors. In the main, however, it is people who are looking for an investment product which will still allow them lots of flexibility to react to the changing economic conditions. Since the global financial crisis took hold around a decade ago, the UK’s economy has grown but only at an historically low rate. As such, conventional investment opportunities – such as holding money in a pension or a savings account, for instance – has led to rather disappointing results.

With historically low interest rates set by the Bank of England, it has been more attractive to borrow than to invest, in many cases. And yet, some ordinary investors have been put off placing their hard earned cash into long-term investment products because they know that – at any time – interest rates could go up once more and they want their money available to move into new investment vehicles at a moment’s notice.

Why Take a Short Term View?

For the relatively cautious investor, short term bonds are the ideal choice. They may not suit everyone – depending on their individual attitude to risk, of course – but they offer a superb opportunity to see a better return on investment than they would get in conventional financial products whilst still allowing them the flexibility to move into another investment field once the term to maturity has been exceeded. In the case of a 1 year bond, this would mean only tying up your money for a single twelve-month period and few investments offer this level of return for such as short-lived commitment.

Given the advantages that a shorter maturation term affords, you may ask yourself why you also ought to consider the benefits of intermediate term bonds. Having said that, longer term investors will often turn to these sorts of products because they offer even greater returns. Read on to find out more about investment opportunities with longer terms to maturation.

Intermediate Term Bonds

As their name implies, intermediate term bonds offer a kind of halfway house between short and long term bonds. They are typically offered over lengths of time that exceed five years and among the commonest term would be investments made into 10 year bonds. As such, this sort of investment opportunity means making a much fuller commitment to the market that the bond will be invested in. 

Although it is sometimes possible to liquefy an intermediate term bond prior to it fully maturing, little or none of the interest that has thus far accrued in the form of coupons will be able to be redeemed. Like any intermediate term investment, they should only be entered into with some expert advice having been sought. Investors need to fully understand that to get the best out of their investment that their money will be tied up and unavailable for other sorts of expenditure, for example to use to move up the property ladder or to meet unexpected costs.

Intermediate Bonds and the Renewable Energy Market

Several renewable energy companies that build anything from biofuel plants to wind farms offer intermediate term bonds. Although many of them also offer shorter term bonds, such as 2 year bonds, the better interest rates tend to be found with intermediate terms. The chief reason that renewable energy bonds make such good intermediate term investments is that there is such growth potential in that particular industry. Renewable energy bonds provide opportunities for investors to make a strong return on their investment in the medium term.

Indeed, some of the intermediate term investment bonds offered within the renewable sector are so good that many people who take them out immediately reinvest them following the passing of their portfolio’s maturation date. The reason that such bonds are offered is that the sector requires significant investment to provide the UK with energy security and to meet its carbon reduction commitments in the future. Only by offering attractive interest rates can businesses raise the necessary capital to build the energy production infrastructure of the future.

Who Do Intermediate Term Bonds Appeal To?

Given that many investors wish to support the green initiatives of renewable energy companies, these sorts of investment appeal to lots of people from an ethical point of view. In addition, the medium term length of such investments means they are attractive to people with capital that they don’t mind tying up for a decade.

They can, therefore, make excellent alternative investments to, for example, underperforming pension pots. In fact, intermediate investment terms to maturation appeal to a broad range of people who want to put their money into a relatively stable product but who won’t need to be able to liquefy their investment at short notice due to potentially changing personal circumstances.

Long Term Bonds

Long term bonds offer all of the advantages of intermediate term ones but they do so over even longer periods of time. As such, 15 year bonds and even 20 year bonds are available to investors who are looking for an investment product which will provide them with the highest rates of return.

The terms of these sorts of investments can be even longer and 30 year bonds are not unheard of. As such, they provide reliability in respect of general economic cycles which can make other investment products – like pensions, for instance – see wild differences in the amount of money they make over their respective terms.

Who Do Long Term Bonds Appeal To?

There are all sorts of different types of bond which are offered over longer terms. These sorts of investment products tend to appeal to people who are seeking a portfolio of investments which match their short, medium and longer term aspirations. Given that they take a long time to reach maturation, they are not always the best investment for older people unless they are specifically investing as a part of their legacy planning.

Longer term bonds are not desirable for people who may want to change their plans in the years to come but they are ideal if you are looking for a product which can ride out any downturns in the economy that may negatively impact on other investment types.

Biofuel Bonds

11% Fixed Returns

For the first 3 years
  • Ventures begin at £10,000
  • Regular returns on a bi annual basis
  • Continually growing market
  • 12 month minimum term
  • No hidden fees
Find Out More

Wind Energy Bonds

12% Fixed Returns

For the first 3 years
  • Minimum fixed term of 12 months
  • Low entry level starting at £10,000
  • Sector upheld by HM Government
  • No Hidden Fees
  • Experienced management team
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Property BondsHigh Returns

14% Fixed Returns

For the first 3 years
  • Paid quarterly or bi annually
  • Asset backed security on capital
  • Market seeing solid development
  • Extensive track records
  • Entry levels start at £10,000
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