DEFINITION of 'Seasoning'

Seasoning is the length of time a debt security has been publicly traded. Seasoning determines if a premium should be made for the security in the secondary market. The debt security can be "unseasoned" if has been traded for less than a year, or "seasoned" if it has been traded for over a year with a good payment track record.

BREAKING DOWN 'Seasoning'

Seasoning is a theorized period in which newly issued bonds trade at prices which translate into a higher yield than those of comparable existing or seasoned bonds. The prices of the new issues eventually adjust, taking a few years, to become comparable to the prices of seasoned issues. In effect, the bond will converge to its ideal price after seasoning. A higher yield on a bond represents a higher cost of borrowing for the issuer. Seasoning, therefore, results in additional costs to the borrower. To put another way, seasoning is the length of time established borrowers incur higher debt than new entrants and, thus, have larger debt ratios on average. On the other hand, since material information pertinent to the pricing of these new securities is not reflected in the issue price, investors have an opportunity to earn excess returns above those justified by the associated risks.

Seasoning is another way of characterizing investments that have a reputation, with that reputation built on an investment's history. Investors are typically more skeptical of new investments without a proven record, and are more likely to pay a premium for securities that are safer. In the case of a seasoned note, the quality of having more than 12 months of payments indicates that the likelihood of the note being paid back in full are high.

In the mortgage sector, seasoning refers to the age of the mortgage. Typically a mortgage is considered to be fully seasoned when it has been held for at least a year. Any holding period less than a year will mean the mortgage is unseasoned, a period during which selling or refinancing the loan may not be approved by lenders. In addition, most lenders will not let you cash out your equity or take out home equity lines of credit (HELOC) without full seasoning.

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