Maturity value refers to the value of an interest-paying investment when its time paying interest is through. You can calculate maturity value for bonds, notes and some bank products such as certificates of deposit. Remember to take into account how frequently interest is compounded on the account and to use the proper interest rate corresponding to that, whether annual, monthly or something else.
Understanding Maturity Value
While certain interest-paying investments, such as traditional bank accounts, may have interest forever, others have a fixed date at which they will return your principal, or original investment, and interest and stop paying out. That date is known as the investment's maturity date.
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The investment's total value on that date is known as the maturity value. This value is, by definition, the sum of the original principal plus all the interest that has been paid out. You may have this value spelled out in the terms of the investment and you may be able to have the organization issuing the investment opportunity spell it out. You can also calculate it yourself using an online calculator tool or a relatively simple formula.
Calculating Maturity Value
To calculate maturity value, you must know the initial principal on the investment, how frequently interest is compounded and what the interest rate per compounding period is. Compounding interest refers to the process of adding it to the principal for purposes of determining how much interest to pay in the future, and different investments can compound interest on different schedules, whether daily, monthly or annually.
Once you have that information, use the formula V = P * (1 + r)^n, where P is the initial principal, n is the number of compounding periods and r is the interest rate per compounding period.
For example, if you have an account that pays 5 percent interest compounded annually with a maturity date in three years and a principal of $1,000, the maturity value is V = 1000 * (1 + 0.06)^3 = $1,191.016, which normally rounds to $1,191.02.
Converting Interest Rates
If interest is compounded more or less frequently than annually, but the interest rate is an annual rate, you will need to convert it to the appropriate period. For example, if that same account compounds interest monthly rather than annually, you would convert the 6 percent annual interest rate to 6 percent / 12 = 0.5 percent = 0.005 monthly interest rate. Then, over those three years, you will have 36 compounding periods rather than just three.
That makes the value formula give the result V = 1000 * (1 + 0.005)^36 = $1,196.68. Notice that the more frequent compounding means more interest paid out, which can make a difference if long periods of time or large amounts of money are in play.
Using with Bank Accounts
An ordinary savings account does not have a true maturity date, since the bank doesn't close your account and pay you back after a certain period of time. But if you want to know how much money will be in your account as of a certain day, you can use the maturity value formula based on how much money is in your account, how frequently interest is compounded and what your interest rate is.
One complexity with bank accounts is that you often put more money in over time or take money out to spend or transfer to other investments, unlike a bond or a certificate of deposit where the amount of money generally stays the same over time. Another issue that many bank accounts have fluctuating rather than fixed interest rates, so you will not necessarily get the same rate over time, limiting the formula's applicability.