maturity

Let's assume that on January 1, 2000, you purchased an XYZ Company bond that had a 10-year maturity. That means that on January 1, 2010, XYZ Company will pay you (or whomever you happen to sell the bond to) the face value (also called the par value) of the bond. The face value is essentially the size of the I.O.U. represented by the security certificate. That is, the face value is the original principal lent to the company. Bond face values are usually $1,000, and preferred stock face values are usually $25.

Some bond and preferred stock maturities are short-term (a year or less), others are intermediate-term (usually two to 10 years) and many are long-term (a period of 10 to 30 years or more). Bonds with maturities of less than 10 years are typically called notes.

Sometimes investors get their original principal back before the maturity date. This usually happens when the issuer takes advantage of special provisions that a security might have. For example, call provisions allow an issuer to redeem, or call, a bond or preferred stock before it matures. Issuers like this provision because if interest rates fall they can pay off the securities with proceeds from new securities issued at a lower interest rate. Investors don't always welcome this because they lose their ability to collect what could be above-market interest payments and they may have to reinvest the money from their redeemed securities at a lower interest rate. To compensate investors for these risks, issuers of callable bonds usually agree to pay more than the face value depending on when the securities are redeemed.

Another example is the sinking fund provision, which requires the issuer to make payments to a trustee while the securities are outstanding. The trustee then uses the funds to repurchase some or all of the securities on the open market.

Usually issuers control whether a security is redeemed before it matures, but in some cases, investors can control this process. A convertible bond, for example, gives the bondholder the option to exchange the bond for a predefined number of securities (usually the issuer's stock) at some future date and under prescribed conditions. An exchangeable bond, on the other hand, allows the bondholder to exchange the bonds for the stock of a company other than the bond issuer. Putable bonds and preferred stocks allow their holders to force the issuer to redeem the security at a set price under certain conditions.