Maturity Value Formula (Table of Contents)
- Maturity Value Formula
- Examples of Maturity Value Formula (With Excel Template)
- Maturity Value Formula Calculator
Maturity Value Formula
Maturity, as its name suggests, is the date on which the final payment for the financial instrument like a bond, etc. happens and there is no more payment which a borrower has to pay afterward. So basically all the interest and principal amount is paid in full at maturity and the contact seizes to exist. For most of the securities like loan and bonds, the maturity value is the same as the per value but different financial instruments have a different definition of maturity value. For example Maturity for a swap transaction is basically the date of final cash settlement. For commodity transaction, maturity is when the physical delivery of the commodity happens, etc. So the amount which the investor gets at the maturity date is known as maturity value. Maturity value also depends upon what type of interest an investor is getting on the investment. Maturity value in case of simple interest will be different than the maturity value for compound interest.
Formula FOR Maturity Value:
Like explained above, different financial instruments have a different interpretation of maturity value.
- For Simple Interest Case, Maturity Value:
- For Compound Interest Case and zero coupon bonds, the Maturity Value:
Where
- V – Maturity Value
- P – Principal Invested
- R – Rate of Interest
- T – Time of Investment
In case of a bond which pays periodic coupon payments, the maturity value is basically the par value of the bond.
Examples of Maturity Value Formula (With Excel Template)
Let’s take an example to understand the calculation of Maturity Value formula in a better manner.
Maturity Value Formula – Example #1
Let say you have invested a sum of $10,000 in a Bank for 5 years and a bank is offering you 10% simple interest and 7.5% compound interest per year on this investment. You want to calculate the maturity value of this investment.
In Case of Simple Interest
Maturity Value is calculated using the formula given below
V = P * (1 + R * T)
- Maturity Value = $10,000 * (1 + 10% * 5)
- Maturity Value = $15,000
In Case of Compound Interest
Maturity Value is calculated using the formula given below
V = P * (1 + R) ^ T
- Maturity Value = $10,000 * (1 + 7.5%) ^5
- Maturity Value = $14,356.29
Maturity Value Formula – Example #2
Continuing the above example, you have $10,000 to invest for 5 years and now you have arranged a quotation from 3 different financial institutions:
- Institution 1: 9% interest compounded semi-annually
- Institution 2: 8.8% interest compounded quarterly
- Institution 3: 9% interest compounded monthly
Now you want to compare the maturity value of these investment proposals and then want to choose one among these three options. So:
Solution:
Institution 1: 9% Interest Compounded Semi-Annually
Maturity Value is calculated using the formula given below
V = P * (1 + R) ^ T
- Maturity Value = $10,000 * (1 + 4.5%) ^ 10
- Maturity Value= $15,529.69
Institution 2: 8.8% Interest Compounded Quarterly
Maturity Value is calculated using the formula given below
V = P * (1 + R) ^ T
- Maturity Value = $10,000 * (1 + 2.2%) ^ 20
- Maturity Value = $15,453.18
Institution 3: 9% Interest Compounded Monthly
Maturity Value is calculated using the formula given below
V = P * (1 + R) ^ T
- Maturity Value = $10,000 * (1 + 0.75%) ^ 60
- Maturity Value = $15,656.81
So out of these three options, if you see, Institution 3 has the highest maturity value.
Explanation
As explained above, maturity value is the value which an investor will get at the expiration of the contract. Investors, before investing their money can follow the following steps to determine the maturity value of the investment and then can compare different options to make the best decision:
- The first step is to find out what is the type of interest you are going to earn on the investment. Compound interest will result in higher maturity value than simple interest rate if the rate of interest is the same.
- Secondly, in the case of compound interest, investors will also have to look at the frequency of the compounding because the frequency of compounding has a direct impact on the maturity value. Higher the frequency, higher will be the maturity value. For example, monthly compounding will have higher maturity value than semiannual compounding given the same rate.
- Once all the above steps are taken care of, investors can then simply use the maturity value formula and can calculate the maturity value.
Like discussed earlier, the nature of the financial instrument also affects the maturity value. For bonds which pays coupons will have maturity value which equals to its par value because all the interest is paid in the form of coupons.
Relevance and Uses of Maturity Value Formula
Since maturity value is the amount which an investor will get at the maturity of the contract, this is a very useful concept which helps investors to see what will be the worth of their investment. They can compare the maturity value of various financial instruments which will help them in making an informed decision. Also when an investor chooses investments which pay compound interests, they earn interest on the interest also, because of which their maturity value gets the compounding effect. But investors should be very careful while choosing the financial instrument and should not take a decision only based on maturity value. Just because an investment is giving higher maturity value does not guarantee that you will receive that money and there is a probability that the borrower can default. So along with the maturity value, the credit history of a borrower and other factors are also important and an investor should take care of that also.
Maturity Value Formula Calculator
You can use the following Maturity Value Calculator
| P | |
| R | |
| T | |
| Maturity Value Formula | |
| Maturity Value Formula = | P * (1 + R)T |
| = | 0 * (1 + 0)0 = 0 |
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