Final answer:
The bond's maturity date is the specific date when the principal amount of the bond must be repaid by the issuer to the bondholder. Bonds are important investment tools for entities to raise capital and for investors seeking to earn interest. The value and attractiveness of bonds can fluctuate with changing interest rates and perceived risk.
Step-by-step explanation:
The exact date when the issuing firm must repay the principal to a bondholder is known as the bond's maturity date. Bonds are a form of debt financing used by both public and private entities to raise funds for various purposes. When a company, such as a public company or municipality, needs capital, they can issue bonds which are then purchased by investors. The issuer promises to pay back the principal amount on the maturity date, as well as periodic interest payments, known as coupons, throughout the bond's life.
As an example, if a private company issues bonds for $10 million with an 8% annual interest rate, they will pay $800,000 in interest to bondholders each year. After the specified term, which might be 10 years, the company must repay the original $10 million. If interest rates fluctuate, the bond's present value can change, affecting its attractiveness to investors. A bond's risk is associated with the issuer's ability to make scheduled payments and return the principal on the maturity date. Higher risk can lead to higher yields to attract investors.
In addition to large-scale bond issues by corporations, investors may also encounter municipal bonds which are issued by cities to fund local projects. Investment diversification can be achieved through mutual funds that buy a collection of bonds, stocks, or other securities. Individual investors may prefer investing in mutual funds as opposed to directly purchasing bonds themselves.