Yield-To-Average Life

AAA

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.

INVESTOPEDIA EXPLAINS '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).

RELATED TERMS
  1. Bond

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

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

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

    A means of repaying funds that were borrowed through a bond issue. ...
  5. Maturity

    The period of time for which a financial instrument remains outstanding. ...
  6. Average Life

    The length of time the principal of a debt issue is expected ...
RELATED FAQS
  1. I have discovered that a bond I am interested in has a sinking fund. What does this ...

    First, understand that a sinking fund provision is really just a pool of money set aside by a corporation to help repay a ... Read Full Answer >>
Related Articles
  1. Bonds & Fixed Income

    Understanding Bond Prices and Yields

    Understanding this relationship can help an investor in any market.
  2. Insurance

    Investing In Securitized Products

    Securitized assets are customizable and have a wide range of yields, making them an attractive asset class.
  3. Bonds & Fixed Income

    The Risks Of Mortgage-Backed Securities

    Find out how weighted average life guards against prepayment risk.
  4. Bonds & Fixed Income

    Advanced Bond Concepts

    Learn the complex concepts and calculations for trading bonds including bond pricing, yield, term structure of interest rates and duration.
  5. Economics

    Understanding Perpetuity

    Perpetuity means without end. In finance, a perpetuity is a flow of money that will be received on a regular basis without a specified ending date.
  6. Bonds & Fixed Income

    How to Diversify with Muni Bond ETFs

    Thinking of diversifying with bonds? Consider these muni bond ETFs.
  7. Bonds & Fixed Income

    Should Junk Bond ETFs Be a Part of Your Portfolio?

    Should junk bonds be a part of your portfolio? Here's what you need to know.
  8. Mutual Funds & ETFs

    How To Build A Bond Ladder?

    Bond laddering is a strategy used when building a portfolio: an investor can spread out interest rate risk and create a stream of cash flows for income.
  9. Investing Basics

    Explaining Interest Rate Risk

    Interest rate risk is the risk that investments already held will lose market value if new investments with higher interest rates enter the market.
  10. Investing Basics

    What is an Asset Class?

    A group of securities that exhibit similar characteristics, behave similarly in the marketplace, and are subject to the same laws and regulations.

You May Also Like

Hot Definitions
  1. Fiat Money

    Currency that a government has declared to be legal tender, but is not backed by a physical commodity. The value of fiat ...
  2. Interest Rate Risk

    The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between ...
  3. Income Effect

    In the context of economic theory, the income effect is the change in an individual's or economy's income and how that change ...
  4. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the ...
  5. Hurdle Rate

    The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, ...
  6. Market Value

    The price an asset would fetch in the marketplace. Market value is also commonly used to refer to the market capitalization ...
Trading Center