The many different types of bonds are divided into major categories, including U.S. Treasuries, corporate bonds and collateralized debt obligations, which are bonds secured by other bonds. Some bonds have a definite maturity date, while others have a provision giving the issuer the option to redeem the bonds early on any of several specified dates. The bond issuer must distinguish between the maturity values relative to bonds payable to ascertain which is the most beneficial time for redemption.
Bonds are a form of debt for the issuing government or corporation. These entities sell bonds to raise money for expansion or a specific project, such as constructing a new highway. Some bonds are sold at face value, while others have a discounted price. The U.S. Treasury is one of the largest bond issuers.
Bonds payable refers to bonds that have already reached maturity, but the investor has not yet redeemed them. This group includes bonds with puts or calls that are called in early by the issuer. Bonds do not increase in value once they are called for redemption.
Maturity value is the amount of money that a bond is worth when it reaches maturity. Investors and bond issuers can calculate maturity value only on bonds that do not have call or put features, as these might result in early redemption. They can estimate the maturity value of bonds with calls or puts using benchmark pricing curves. Bonds purchased at a discount and held until maturity usually have a maturity value equal to face value.
Benchmark Pricing Curves
There are five popular benchmark pricing curves that investors use to estimate maturity value. They are the U.S. Treasury curve, Spot Rate Treasury curve, Eurodollars curve, Agency curve and Swap curve. These curves list yields at future points in time, from three months to 30 years. For example, the U.S. Treasury only issues bonds with maturities of three months, six months, two years, three years, five years, 10 years and 30 years. These maturity dates are the benchmarks for the U.S. Treasury curve.
Distinguishing Between Maturity Values
Governments and corporations redeem their bonds at the most financially advantageous time for the issuer. For example, a company issues 10-year bonds with redemption options at six years and eight years after issuance. The issuer calculates the maturity value at each of the redemption dates. When it gets close to each possible redemption date, the issuer will distinguish between maturity values when deciding whether to call the bonds early. Once the issuer issues a call, the redemption value becomes matured bonds payable on the company's books.
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