Maturity value or maturity value is the amount paid to investors at the end of the holding period or maturity date. For most bonds or debentures, the maturity value is the face value stated on the bond. For most certificates of deposit (SD) and other investments, all interest is paid at maturity. If all interest is paid at maturity, each payment is compounded interest. To calculate the maturity value of this investment, the investor adds all the compound interest to the value of the initial investment.
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Part 1 of 2: Reviewing Debt Instruments
Step 1. Research the bond features
Bonds are issued to raise money for a specific purpose. Corporations issue bonds to raise money to run a business. A government entity, such as a city or state, can issue bonds to pay for a project. For example, the city government could issue bonds to build a public swimming pool.
- Each bond is issued with a specific par value. The face value of a bond is the value that investors will receive at maturity. The maturity date of the bond is the date on which the issuer must pay the face value. In some cases, the face value and all interest earned are repaid at maturity.
- All details of the bond are listed on the bond certificate. Currently, bond certificates are issued in electronic form. Professionals in the investment field call the electronic format the book entry form.
- The face value and maturity date are listed on the book records listed on the bond certificate, along with the interest rate.
- For example, if you buy a Rp10,000,000 6% IBM corporate bond with a maturity of 10 years, all these details will be listed on the electronic bond certificate.
Step 2. Consider the amount you receive when it is due
Most corporate bonds pay interest semi-annually. At maturity, you get the face value of the bond. Other debt instruments, such as certificates of deposit (SD) pay face value and all interest at maturity. Another term for nominal value is principal value or face amount.
- The formula for calculating interest is (principal value times interest rate times time period)
- The annual interest on the IBM bonds is (CU10,000,000 X 6% X 1 year) = CU600,000.
- If all interest is paid when due, the first year interest of Rp600,000 will not be paid until the end of the 10th year. In fact, the annual interest will be paid at the end of the 10th year, along with the par (principal) value.
Step 3. Add compound interest
Compound interest or interest bearing interest means that investors get interest from both the nominal value of the debt instrument and the interest previously earned. If your investment pays all interest at maturity, you may earn compound interest on your previous interest income.
- The periodic rate is the interest rate you earn for a specific period of time, such as days, weeks, or months. To calculate compound interest, you must determine the periodic rate.
- Assume your investment earns 12% interest annually. Your flowers bloom monthly. In this case, your periodic rate is (12%/12 months = 1%).
- To calculate compound interest, you multiply the periodic rate by the face value.
Part 2 of 2: Determining the Maturity Value
Step 1. Use the periodic rate to find out the interest you earn
Assume you have a certificate of deposit (SD) IDR 1,000,000 12% which will mature in 3 years. SD pays all interest on maturity. To find the maturity value, you need to calculate all your compound interest.
- Let's just say that your SD is compounded monthly. Your period rate is (12%/12 months = 1%). To keep it simple, assume each month has 30 days. Many investments, including corporate bonds, use 360 days a year to calculate interest.
- Assume January is the first month you have SD. In the first month, your interest is (Rp 1,000,000) X (1%) = Rp 10,000.
- To calculate interest in February, you need to add January interest to your principal amount. Your new principal value in February is (Rp1,000,000 + Rp10,000 = Rp1,010,000).
- In February, you earn total interest (Rp1,010,000 X 1% = Rp10,100). As you can see, the interest in February is higher than January by Rp. 100. You earn additional interest due to the compound interest concept.
- Every month, you add up the previous interest on the principal amount of IDR 1,000,000. This amount is your new principal balance. You use the balance to calculate interest for the next period (next month in this case)
Step 2. Use the formula to quickly calculate the maturity value
Instead of calculating compound interest manually, you can use a formula. The maturity value formula is V = P x (1 + r)^n. Where V, P, r, and n are the variables in the formula. V (value) is the maturity value, P is the original or original principal value, and n is the number of compound interest intervals from the time of issue to maturity. The variable r represents the periodic interest rate.
- For example, imagine 5 years of elementary school, IDR 10,000,000, compounded monthly. The annual interest rate is 4, 80%.
- The periodic rate (variable r) is (0.048 / 12 months = 0.004).
- The number of compound interest periods (n) is calculated by taking the number of years and multiplying by the frequency of compounding. In this case, you can calculate the number of periods as (5 years X 12 months = 60 months). The variable n is equal to 60.
- Maturity value, or V = $10,000,000 x (1 + 0.004)^60. Therefore, the maturity value of V is Rp12,706,410.
Step 3. Look for an online maturity calculator
Find an online calculator for maturity values using a search engine. Make your search specific to the security you want to value. For example, if you have funds in the money market, type “money market fund maturity value calculator.
- Look for sites that have a good reputation. The quality and usability of each online calculator can vary greatly. Use two different calculators to confirm the results of your calculations.
- Enter your information. Enter data from your investment or proposed investment into the calculator. This includes the principal, the annual interest rate, and the duration of the investment. It can also include the frequency of compound interest on investments.
- Check the results. Make sure the maturity value is reasonable. To verify if the due value is valid, try confirming the result on another online calculator.
