What is Interest at Maturity?
Interest at maturity is offered with many bonds or investments, and it means that the entire accrued amount of interest will be paid at the maturity date of the investment. Normally, when a person borrows from or invests money with a bank or financial institution, there will be interest applied to that sum. The “maturity” date is predetermined when the bond or investment is taken out, and it is the date that the investor is due to reclaim the original lump sum, along with any accrued interest. Bonds offering interest at maturity are sometimes called “zero-coupon” bonds or “strips.”
Interest is extra money payable to the lender as compensation for being out of pocket. When a person invests money with a bank, he or she is lending money to the bank and is entitled to interest. Interest is usually conveyed through percentages and agreed upon before the bond or investment is taken out. For example, a person might decide to save $5,000 US Dollars (USD) in a one-year bound paying 5 percent interest. Over the course of that year, the original bond amount will gain an additional 5 percent in value, so the investor would expect an additional payment of $250 USD one year after making the investment.
Bonds and investments are usually taken out for longer periods than a year, often even 10 years, and the interest payments are generally not all paid on maturity. Often, it can be arranged to have the interest paid every six months, which means that the interest will be calculated and sent to the investor in the form of a check or by electronic transfer. Many people prefer this type of bond because they get a consistent return on their money.
Interest at maturity bonds pay the entire interest at the date of maturity, but the interest is usually still calculated and accrued each year. This means that the interest payments are added to the originally invested amount, and the interest itself then begins to compound. In other words, the investor gains interest on top of his or her interest year after year until receiving the entire sum after the term of the investment.
These types of investments are mainly suited to people saving for a specific purpose. If someone wants to save money to pay for a child’s college education, then it is preferable for him or her to get the interest at maturity, because then all of the money accrued will be available for that designated purpose. Depending on the terms and conditions of the investment, the investor might be paid at a lower rate than agreed if he or she reclaims the investment before the maturity date. The other side to this is that interest at maturity policies generally offer better interest rates than standard investments that pay more frequently, so they might be worth considering for investors who are unlikely to need the money before the maturity date.
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