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When you buy a bond, you take on the risk that interest rates will rise before the bond matures. That would stick you with a bond that is paying below-market rates. You can sell the bond, but because the price will be determined by the current yield on new, similar bonds, you will likely have to sell it for less than what you paid. This is called maturity risk , a form of interest rate risk.
However, you might care about missing out on higher available interest rates. Bondholders protect themselves from rising interest rates by demanding a lower price and therefore a higher yield on bonds with longer maturity dates.
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The increase in required yield due to longer maturity is called the maturity risk premium. All things being equal, bonds with longer maturity dates must provide higher yields and lower prices in order to compete with shorter-maturity bonds. Eric Bank is a senior business, finance and real estate writer, freelancing since He has written thousands of articles about business, finance, insurance, real estate, investing, annuities, taxes, credit repair, accounting and student loans.
Eric writes articles, blogs and SEO-friendly website content for dozens of clients worldwide, including get. His website is ericbank.
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What Is a Maturity Risk Premium? Tip A maturity risk premium is a reduced price and subsequent increased yield on a bond that has an extended maturation period. Video of the Day.
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Brought to you by Sapling. About the Author Eric Bank is a senior business, finance and real estate writer, freelancing since Not all bonds have coupons.
What is the difference between a zero-coupon bond and a regular bond?
Such bonds make only one payment: the payment of the face value on the maturity date. Normally, to compensate the bondholder for the time value of money , the price of a zero-coupon bond will always be less than its face value on any date before the maturity date.
During the European sovereign-debt crisis , some zero-coupon sovereign bonds traded above their face value as investors were willing to pay a premium for the perceived safe-haven status these investments hold. The difference between the price and the face value provides the bondholder with the positive return that makes purchasing the bond worthwhile.
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Between a bond's issue date and its maturity date also called its redemption date , the bond's price is determined by taking into account several factors, including:. From Wikipedia, the free encyclopedia.
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Economics: Principles in Action. New York Times. Retrieved Bond market. Bond Debenture Fixed income.
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