What does maturity risk refer to in investment terms?

Maturity risk, often associated with fixed-income securities such as bonds, refers to the risk that the market value of an investment will fluctuate due to changes in interest rates over time. As an investment approaches its maturity date, its sensitivity to interest rate changes can increase, affecting its price.

For example, when interest rates rise, the market value of existing bonds typically falls because newer bonds are issued at higher rates, making the older bonds less attractive. Similarly, if interest rates fall, the value of existing bonds may rise. Maturity risk is most pronounced for long-term investments, as they are more sensitive to fluctuations in interest rates compared to short-term investment options. Understanding this concept is critical for investors when managing their bond portfolios and assessing the potential impacts of interest rate movements on their investments.