DEFINITION of 'Average Effective Maturity '

For a single bond, the average effective maturity is a measure of maturity that takes into account the possibility that a bond might be called back by the issuer. For a portfolio of bonds, average effective maturity is the weighted average of the maturities of the underlying bonds.

BREAKING DOWN 'Average Effective Maturity '

Callable Bonds

Bonds that are callable can be redeemed early by the issuer if interest rates drop to a level that is advantageous for the issuer to refinance or refund the bonds. The early redemption of bonds means that the bonds will have their lifespans cut short. In other words, the bonds will not mature on the stated maturity date listed in the trust indenture. Callable bonds, then, will have an average effective maturity that is less than the stipulated maturity if called.

The average effective maturity can be described as the length of time it takes for a bond to reach maturity, taking into consideration that an action such as a call or refunding may cause some bonds to be repaid before they mature. The longer the average maturity, the more a fund's share price will move up or down in response to changes in interest rates (read our term on duration).

Bond Portfolio

A bond portfolio consists of several bonds with different maturities. One bond in the portfolio could have a maturity date of 20 years, while another could have a maturity date of 13 years. The maturity at the time of issuance will decline as the maturity date approaches. For example, assume a bond issued in 2010 has a maturity date of 20 years. In 2018, the maturity date of the bond will decline to 12 years. Over the years, the maturity of the bonds in a portfolio will decline, assuming the bonds are not swapped for newer issues.

The average effective maturity 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. For the sake of simplicity, let’s assume a portfolio is made up of 5 bonds with maturity terms of 30, 20, 15, 11, and 3 years. These bonds make up 15%, 25%, 20%, 10%, and 30% of the portfolio value, respectively. The average effective maturity of the portfolio can be calculated as:

Average effective maturity = (30 x 0.15) + (20 x 0.25) + (15 x 0.20) + (11 x 0.10) + (3 x 0.3)

= 4.5 + 5 + 3 + 1.1 + 0.9

= 14.5 years

On average, the bonds in the portfolio will mature in 14.5 years.

The average effective maturity 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 weighted average maturity of the portfolio is essential to knowing the interest rate risks faced by that portfolio. For instance, longer-maturity funds are generally considered more interest-rate sensitive than their shorter counterparts.


  1. Term To Maturity

    In bonds, term to maturity is the time between when a bond is ...
  2. Balloon Interest

    Balloon interest is an increased coupon rate on long-term maturity ...
  3. Straight Bond

    A straight bond is a bond that pays interest at regular intervals, ...
  4. Zero-Coupon Bond

    A zero-coupon bond is a debt security that doesn't pay interest ...
  5. Bond Fund

    A bond fund is a fund invested primarily in bonds and other debt ...
  6. Serial Bond

    A serial bond is a bond issue in which a portion of the outstanding ...
Related Articles
  1. Investing

    How To Evaluate Bond Performance

    Learn about how investors should evaluate bond performance. See how the maturity of a bond can impact its exposure to interest rate risk.
  2. Financial Advisor

    The Effect of Fed Fund Rate Hikes on Your Bond Portfolio

    Learn how an increase in the federal funds rate may impact a bond portfolio. Read about how investors can use the duration of their portfolio to reduce risk.
  3. Investing

    Comparing Yield To Maturity And The Coupon Rate

    Investors base investing decisions and strategies on yield to maturity more so than coupon rates.
  4. Investing

    Lowering Portfolio Volatility With Certain Bond ETFs (AGG, BND)

    Learn about how overall portfolio risk can be reduced by adding a variety of different types of bond ETFs to a primarily stock portfolio.
  5. Investing

    Corporate Bonds for Retirement Accounts

    Corporate bonds are usually the preferred choice in retirement accounts. Here are some of the benefits of corporate bonds, and strategies for a portfolio.
  6. Investing

    Corporate Bond Basics: Learn to Invest

    Understand the basics of corporate bonds to increase your chances of positive returns.
  7. Financial Advisor

    7 Questions to Consider Before Investing in Bonds

    There is a significant number of questions every investor, private or institutional, should consider before investing in bonds.
  8. Investing

    Advanced Bond Concepts

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