Final answer:
The maturity of a bond refers to the date when the borrower must repay the bond, including the face value and the last interest payment. The duration of a bond refers to the average time it takes for an investor to receive the present value of all cash flows from the bond, including both coupon payments and the face value.
Step-by-step explanation:
In financial terms, the maturity of a bond refers to the date when the borrower must repay the bond, including the face value and the last interest payment. This is the date that the bond becomes due and the investor can expect to receive their money back. On the other hand, the duration of a bond refers to the average time it takes for an investor to receive the present value of all cash flows from the bond, including both coupon payments and the face value.Let's say you have a bond with a face value of $1,000, a coupon rate of 5%, and a maturity date of 5 years. The bond pays semi-annual coupons, so you receive $25 every six months. The bond's duration takes into account the time value of money and estimates how long it will take on average for you to recoup your initial investment. If interest rates increase, the bond's present value decreases, and the duration increases. Conversely, if interest rates decrease, the bond's present value increases, and the duration decreases.In summary, the maturity of a bond refers to the date when the borrower must repay the bond, while the duration of a bond refers to the average time it takes for an investor to recoup their initial investment in present value terms.