Yield-To-Average Life


DEFINITION of 'Yield-To-Average Life'

The yield calculation of a bond that is systematically retired throughout its life. This yield replaces the stated final maturity with the average life maturity. The yield-to-average life calculation is often used in the case of a sinking fund where the issuer purchases its own bonds on the open market to fulfill its sinking fund obligations when the bonds are trading below par.

BREAKING DOWN 'Yield-To-Average Life'

The yield-to-average life allows investors to determine the expected return when a bond is not held to maturity either because of sinking fund obligations or, in the case of mortgage-backed securities (MBS), because of the prepayment of the underlying mortgage debt. The yield-to-average life metric is used in regard to the pricing of mortgage-backed securities, such as collateralized mortgage obligations (CMOs) issued by the Federal Home Loan Mortgage Corporation and private issuers. Because an MBS generally repays principal throughout the life of the investment, the prepayment of the underlying mortgage debt can affect the investor's return (depending on whether the MBS was purchased at a discount or at a premium).

  1. Maturity

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

    A debt investment in which an investor loans money to an entity ...
  3. Collateralized Mortgage Obligation ...

    A type of mortgage-backed security in which principal repayments ...
  4. Sinkable Bond

    A bond issue that is backed by a fund, called a sinking fund, ...
  5. Sinking Fund

    A means of repaying funds that were borrowed through a bond issue. ...
  6. Average Life

    The length of time the principal of a debt issue is expected ...
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