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. Collateralized Mortgage Obligation ...

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

    A bond issue that is backed by a fund, called a sinking fund, ...
  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. 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 ...
Related Articles
  1. Understanding Bond Prices and Yields
    Bonds & Fixed Income

    Understanding Bond Prices and Yields

  2. Investing In Securitized Products
    Insurance

    Investing In Securitized Products

  3. The Risks Of Mortgage-Backed Securities
    Bonds & Fixed Income

    The Risks Of Mortgage-Backed Securities

  4. I have discovered that a bond I am interested ...
    Investing

    I have discovered that a bond I am interested ...

comments powered by Disqus
Hot Definitions
  1. Ghosting

    An illegal practice whereby two or more market makers collectively attempt to influence and change the price of a stock. ...
  2. Elasticity

    A measure of a variable's sensitivity to a change in another variable. In economics, elasticity refers the degree to which ...
  3. Tangible Common Equity - TCE

    A measure of a company's capital, which is used to evaluate a financial institution's ability to deal with potential losses. ...
  4. Yield To Maturity (YTM)

    The rate of return anticipated on a bond if held until the maturity date. YTM is considered a long-term bond yield expressed ...
  5. Net Present Value Of Growth Opportunities - NPVGO

    A calculation of the net present value of all future cash flows involved with an additional acquisition, or potential acquisition. ...
  6. Gresham's Law

    A monetary principle stating that "bad money drives out good." In currency valuation, Gresham's Law states that if a new ...
Trading Center