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How does the maturity date impact the yield of a bond?

Curious about Maturity date

How does the maturity date impact the yield of a bond?

The maturity date is an important factor in determining the yield of a bond, as it affects the length of time that the bond issuer has to pay back the principal to the bondholder. Generally, bonds with longer maturities have higher yields than those with shorter maturities, as they carry more risk due to the increased uncertainty over a longer period of time. This is because the issuer may face more financial or economic challenges over a longer time horizon, which can make it more difficult to pay back the bondholders. As a result, investors demand higher yields to compensate for this increased risk.

Moreover, longer maturity bonds are more sensitive to changes in interest rates than shorter maturity bonds, which means that changes in interest rates can have a bigger impact on the value of the longer maturity bond. This sensitivity is known as duration, and the longer the maturity of the bond, the higher the duration. As a result, when interest rates rise, longer maturity bonds tend to experience larger price declines than shorter maturity bonds, and vice versa when interest rates fall.

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