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Maturities Define Differences among Short, Intermediate, and Long Bonds

Almost all bonds these days are issued with life spans (maturities) of up to 30 years. These life spans determine whether they are short, intermediate, or long. In the parlance of bond people, any bond with a maturity of less than five years is called a short bond. Bonds with maturities of 5 to 12 years are called intermediate bonds. Bonds with maturities of 12 years or more are called long bonds.

In general, the longer the maturity, the greater the interest rate paid. That’s because bond buyers generally demand more compensation the longer they agree to tie up their money. At the same time, bond issuers are willing to fork over more interest in return for the privilege of holding onto your money longer.

Bank CDs follow the same theory and practice: Typically the two-year CD pays more than the one-year CD, which pays more than the six-month CD.

The difference between the rates you can get on short bonds versus intermediate bonds versus long bonds is known as the yield curve. Yield simply refers to the annual interest rate.

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