Average Effective Maturity

AAA

DEFINITION of 'Average Effective Maturity '

For a single bond, it is a measure of maturity that takes into account the possibility that a bond might be called back to the issuer.

For a portfolio of bonds, average effective maturity is the weighted average of the maturities of the underlying bonds. The measure is computed by weighing each bond's maturity by its market value with respect to the portfolio and the likelihood of any of the bonds being called. In a pool of mortgages, this would also account for the likelihood of prepayments on the mortgages.

INVESTOPEDIA EXPLAINS 'Average Effective Maturity '

This measure is a more accurate way to get a feel for the exposure of a single bond or portfolio. Particularly in the case of a portfolio of bonds or other debt, a simple average could be a very misleading measure. Knowing the average maturity of the portfolio is essential to knowing the interest rate risks faced by that portfolio.

RELATED TERMS
  1. Term To Maturity

    The remaining life of a financial instrument. In bonds, it is ...
  2. Equal Weight

    A type of weighting that gives the same weight, or importance, ...
  3. Maturity

    The period of time for which a financial instrument remains outstanding. ...
  4. Bond

    A debt investment in which an investor loans money to an entity ...
  5. Portfolio

    A grouping of financial assets such as stocks, bonds and cash ...
  6. Weighted Average

    An average in which each quantity to be averaged is assigned ...
Related Articles
  1. Junk Bonds: Everything You Need To Know
    Bonds & Fixed Income

    Junk Bonds: Everything You Need To Know

  2. Corporate Bonds: An Introduction To ...
    Bonds & Fixed Income

    Corporate Bonds: An Introduction To ...

  3. Boost Bond Returns With Laddering
    Bonds & Fixed Income

    Boost Bond Returns With Laddering

  4. If the price of the bond falls, does ...
    Investing

    If the price of the bond falls, does ...

Hot Definitions
  1. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
  2. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  3. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
  4. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
  5. Accelerated Depreciation

    Any method of depreciation used for accounting or income tax purposes that allows greater deductions in the earlier years ...
  6. Call Risk

    The risk, faced by a holder of a callable bond, that a bond issuer will take advantage of the callable bond feature and redeem ...
Trading Center