Average Life

AAA

DEFINITION of 'Average Life'

The length of time the principal of a debt issue is expected to be outstanding. Average life is an average period before a debt is repaid through amortization or sinking fund payments. To calculate the average life, multiply the date of each payment (expressed as a fraction of years or months) by the percentage of total principal that has been paid by that date, summing the results and dividing by the total issue size.


Also called "weighted average maturity" and "weighted average life."

INVESTOPEDIA EXPLAINS 'Average Life'

Average life is calculated to determine how long it will take to pay the outstanding principal of a debt issue such as a t-bill or bond. For example, assume an annual-pay, four-year bond has a face value of $200 and principal payments of $80 during the first year, $60 for the second year, $40 during the third year and $20 for the fourth (and final) year. The average life for this bond would be calculated as:

average life calculation

Average life = 400 / 200 = 2 years. This bond would have an average life of two years against its maturity of four years.

RELATED TERMS
  1. Utility Revenue Bond

    A type of municipal bond that is issued to finance utility projects, ...
  2. Maturity

    The period of time for which a financial instrument remains outstanding. ...
  3. Sinking Fund

    A means of repaying funds that were borrowed through a bond issue. ...
  4. Principal

    1. The amount borrowed or the amount still owed on a loan, separate ...
  5. Weighted Average

    An average in which each quantity to be averaged is assigned ...
  6. Duration

    A measure of the sensitivity of the price (the value of principal) ...
RELATED FAQS
  1. No results found.
Related Articles
  1. Home & Auto

    A Look At Single-Premium Life Insurance

    Want to provide for your dependents and finance your own long-term care? Learn more here.
  2. Investing Basics

    The Seasons Of An Investor's Life

    From a tentative spring to a comfortable winter, learn how to weather the phases of your investing journey.
  3. Insurance

    How Much Life Insurance Should You Carry?

    Learn how much - if any - insurance you really need.
  4. Personal Finance

    Are We Losing The Middle Class?

    Find out where your income and lifestyle put you compared to the national average.
  5. Options & Futures

    How To Avoid Taxation On Life Insurance Proceeds

    Decrease the value of your taxable estate and prevent the tax man from getting you one last time.
  6. Bonds & Fixed Income

    The Risks Of Mortgage-Backed Securities

    Find out how weighted average life guards against prepayment risk.
  7. Economics

    What Would Happen If Interest Rates Rise?

    This time around, while U.S. long-term yields have rebounded from their January lows, rates have generally been lower than where they ended 2014.
  8. Investing

    Strategies To Position Your Bond Portfolio

    Fixed income investors may not be able to see them all right now, but important trends are stirring on the investment horizon.
  9. Savings

    How To Make Money With Airbnb: Risks & Rewards

    Airbnb lets you turn your home or spare room into extra cash. Here's how to make money and protect yourself from the risks.
  10. Mutual Funds & ETFs

    Consider This High-Yield ETF's Risks and Rewards

    Finding quality high-yield opportunities isn’t easy, but the YieldShares High Income ETF (YYY) has potential.

You May Also Like

Hot Definitions
  1. Technical Skills

    1. The knowledge and abilities needed to accomplish mathematical, engineering, scientific or computer-related duties, as ...
  2. Prepaid Expense

    A type of asset that arises on a balance sheet as a result of business making payments for goods and services to be received ...
  3. Gordon Growth Model

    A model for determining the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. ...
  4. Cost Accounting

    A type of accounting process that aims to capture a company's costs of production by assessing the input costs of each step ...
  5. Law Of Supply

    A microeconomic law stating that, all other factors being equal, as the price of a good or service increases, the quantity ...
  6. Investment Grade

    A rating that indicates that a municipal or corporate bond has a relatively low risk of default. Bond rating firms, such ...
Trading Center