Global maturity is when a bond or set of bonds mature in one calendar year, resulting in a large amount of principal. Balloon maturity involves a single fixed maturity date and a sinking fund to ensure repayment. This approach benefits both the issuer and investor, with lower payments and increased yield.
Often associated with a term bond, global maturity is a situation that occurs when the maturity date of a bond or set of bond issues occurs in one calendar year, with the result that an unusually large amount is realized. of principal of the bond. Here is some information on how balloon maturity works and why the approach may be suitable for both the issuer and the investor.
The balloon maturity is usually associated with a bond issue that has a single, fixed maturity date. Instead of quoting the value of the bond in terms of price, the security is quoted at the expected return at maturity. For the global maturity strategy to work, the bond issuer agrees to a redemption schedule that is considered fair to both the investor and the issuer. The redemption of the bond issue is made at a rate that is not different from any type of bond transaction.
What is different is that the issuer agrees to make the payments into a sinking fund that helps ensure the redemption of the term bonds. These earnings contained within the sinking fund can be used before the balloon expires in some cases, but the main purpose is to support resources to meet the balloon’s expiration date on the agreed expiration date.
Using the global maturity approach can be beneficial to both the issuer of the bonds and the investor. Typically, the series of payments that are made over the majority of the bond’s life is substantially less than would occur with a standard commercial loan. This means that the issuer has great flexibility in devising means to meet the maturity date. Part of this process is accomplished by using the sinking fund as a means of pooling resources. Ideally, the sinking fund will have an interest rate that exceeds the anticipated return on the transaction.
For the investor, using a global maturity strategy is a relatively safe investment. The presence of the sinking fund helps to ensure that repayment is made and that there will be an increase in final yield at the maturity date. This means not only recovering the main investment, but also making a good amount of additional income from the project.
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