Duration is however, directly related to the maturity of the debt and needs brief discussion. Duration is a measure of the effective maturity of a financial instrument. However, the duration of a bond with a positive coupon interest rate is less than its time to maturity. For a bond, which has a current market price above its face value, duration increases with the time to maturity, but at a decreasing rate. For a bond with a current price below its face value, duration increases with term to maturity up to a point that is less than the term to maturity and thereafter declines.
Complications arise out of duration and interest elasticity.
When there is a change in interest rates all bond prices respond in an inverse manner but not to the same extent. However, because of refinancing difficulties for higher risk companies, default risk could rise with the approaching maturity date. Although this paper does not concern itself with debt pricing or the concept of duration, the earlier studies show that the maturity date of a medium to long-term debt is related to perceived default risk at a particular point in time. Rating agencies' role Credit ratings agencies provide opinions as to the creditworthiness and thus marketability of bonds and loans. The opinions are taken from various experts and debt issuers and are logically based on the borrowers' historical financial information.