The maturity value is the amount owed to an investor at the end of the holding period of a debt security (maturity date). For most bonds, the maturity value is the face value of the bond itself. For some certificates of deposit (CDs) and other investments, all interest is paid on maturity. If all interest is paid on maturity, each of the interest amounts can be calculated with compound interest. To calculate the maturity value of these investments, the investor adds all compound interest to the face value (original investment).
Steps
Part 1 of 2: Examine a Debt Security
Step 1. Consider the characteristics of the bond
Bonds are issued to raise money for a certain purpose. Companies issue bonds to raise money to pursue their goals. Public entities, such as municipal or state governments, can issue bonds to pay for a project. A city council could, for example, issue bonds for the construction of a new swimming pool.
- Each bond upon issue has a specific nominal value. The face value of the bond is the amount the investor will receive on maturity. The maturity date of a bond is the date on which the issuer will have to repay the par value. In some cases, the face value and all interest are repaid on maturity.
- All the details of the obligation are shown on the bond certificate. Nowadays, bond certificates are issued electronically. Those who work in finance call this electronic format "dematerialized".
- The nominal value and the expiry date are shown on the dematerialized document, together with the interest rate.
- If you buy a € 10,000 corporate bond from ENI with a 6% interest rate that expires in ten years, for example, all the details will be reported on the electronic bond certificate.
Step 2. Consider the amount you will receive on the due date
Most corporate bonds pay half-yearly interest. At maturity, you will receive the face value of the bond. Other debt securities, such as certificates of deposit (CDs), pay face value and all interest at maturity. Another term for face value is "face value".
- The formula for calculating interest is nominal value per interest rate per holding period.
- The annual interest for the ENI bond is € 10,000 x 6% x 1 year = € 600.
- If all interest were paid at maturity, the € 600 first-year interest would not be paid until the 10-year maturity. In effect, each year's interest would be paid at the end of the 10 years, together with the face (or face) value.
Step 3. Add the interest composition effect
This means that the investor receives interest on both the face value of the debt instrument and the accumulated interest. If your investment pays all interest at maturity, you will likely get compound interest on your previous interest income.
- The periodic interest rate is what is paid to you for a particular period of time such as a day, a week or a month. To calculate compound interest, you need to determine the periodic interest rate.
- Assume your investment has an annual rate of 12%. Your interest is compounded on a monthly basis. In this case, your periodic interest rate is 12% / 12 months = 1%.
- To compose the interest, you will multiply the periodic rate by the face value.
Part 2 of 2: Determine the Expiry Value
Step 1. Use the periodic rate to calculate accumulated interest
Suppose you have a $ 1000 certificate of deposit with a 12% interest rate that matures over 3 years. Your CD pays all interest upon maturity. To calculate the value at maturity you will need to derive all compound interest.
- Assuming interest is compounded monthly, your periodic rate is 12% / 12 months = 1%. For simplicity let's assume that each month has 30 days. Many financial instruments, including corporate bonds, consider an annual maturity of 360 days for the calculation of interest.
- Suppose January is the first month you hold the CD. For the first month, your interest is € 1000 x 1% = € 10.
- To calculate February interest, you'll need to add January interest to face value. Your new face value for February will be € 1000 + € 10 = € 1010.
- In February you will accumulate interest of € 1000 X1% = € 10.10. As you can see, the interest of February is 10 cents higher than that of January. Get more interest because of the composition.
- Each month you will add all the interest accumulated in the previous months to the initial nominal value of € 1000; the total will be your new face value. You will use the resulting value to calculate the interest for the next period (one month, in this case).
Step 2. You can use a formula to quickly calculate the maturity value
Rather than manually adding compound interests, you can use a formula. The maturity value formula is V = Px (1 + r) ^ n. As you can see the variables are V, P, r and n. V is the value at maturity, P the initial nominal value and n is the number of compounding periods from issue to maturity. The variable r represents the periodic interest rate.
- For example, consider a CD of $ 10,000 with a 5-year maturity and compound interest monthly. The annual interest rate is 4, 80%.
- The periodic interest rate (the variable r) is 0.048 / 12 months = 0.04.
- The number of composition periods (n) is calculated by multiplying the duration in years of the security and multiplying it by the frequency of the composition. In this case you can calculate the number of periods as 5 years x 12 months = 60 months. The variable n will therefore be equal to 60.
- The value at maturity or V = € 10,000 x (1 + 0.04) ^ 60. The result is V = 12,706.41 €
Step 3. Search the internet for a tool to calculate the maturity value
You can find a maturity value calculator online using a search engine. Do a specific search for the financial instrument you want to know the value of. If you have a money market fund, for example, search for "money market fund at maturity".
- Look for a reputable site. The quality and ease of use of online calculators can vary a lot. Use two different ones to check the result.
- Enter the data. Enter the data of the investment that you have subscribed or has been proposed to you in the calculator. You will need to enter the face value, the annual interest rate and the duration of the investment. You may also need to enter the frequency of the interest composition interval.
- Check the result. Make sure the expiration value makes sense. To verify that the expiration date is reasonable, it is probably worth confirming the result with another online tool.
