What is the 'Yield To Average Life'

Yield to average life is the calculation of a bond that is systematically retired throughout its life. The trustee of a sinking fund bond will use the yield-to-average life calculation to help them determine if they should re-buy some of the bonds on the open market. This is typical when the bonds are trading below par. The average life, in this case, may be significantly less than the actual number of years until maturity.

This yield replaces the stated final maturity with the average life maturity. Average life is also called the weighted average maturity (WAM) or weighted average life (WAL). 

BREAKING DOWN 'Yield To Average Life'

Yield to average life lets the investor estimate the actual return from a bond investment, regardless of the bond's exact maturity date. The yield to average life calculation assumes that the bond matures on the day given by its average life and at the average redemption price instead of the par price. It can be calculated with the same formula as yield to maturity by substituting the average life for the bond’s maturity.

It determines the amount of time it will take to recover one-half of a bond’s face value. Bonds which have a faster repayment of principal will lower the risk of default and allows a bondholder to reinvest their money sooner. Speedier reinvestment can be good or bad, depending on which direction interest rates have moved since the investor bought the bond.

While some bonds repay the principal in a lump sum at maturity, others repay the principal in installments over the term of the bond. This installment method of repayment is called a sinking fund feature. In these bonds, the indenture requires the issuer to set money aside into a separate account regularly. This account is for the exclusive purpose of redeeming the bonds. With the amortization of a bond's principal in this way, the average life calculation will allow investors to determine how soon repayment of the principal will be.

A sinking fund is a means of repaying funds borrowed through a bond issue through periodic payments to a trustee who retires part of the issue by purchasing the bonds in the open market. A sinking fund improves a corporation's creditworthiness, letting the business pay investors a lower interest rate.

Yield To Average Life for Mortgage-Backed Securities

Yield-to-average life allows investors to determine the expected return of mortgage-backed securities (MBS), because of the prepayment of the underlying mortgage debt. This metric is useful in the pricing of MBSs, such as collateralized mortgage obligations (CMOs) issued by the Federal Home Loan Mortgage Corporation and private issuers.

An MBS generally repays principal throughout the life of the investment. Depending on whether the MBS was purchased at a discount or a premium, the advanced paying of the principal can affect an investor's expected return. An environment with declining interest rates will often lead homeowners to refinance. In the refinancing process, the old loan is paid off as a new loan with lower interest payments takes it place.

  1. Yield-To-Average Life

    The yield calculation of a bond that is systematically retired ...
  2. Average Life

    Average life is the length of time the principal of a debt issue ...
  3. Term Bond

    Term bonds mature on a specific date in the future and the bond ...
  4. Bond Fund

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

    A bond is a fixed income investment in which an investor loans ...
  6. Bond Ladder

    A bond ladder is a portfolio of fixed-income securities in which ...
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. Investing

    Why Bond Prices Fall When Interest Rates Rise

    Never invest in something you don’t understand. Bonds are no exception.
  3. Investing

    Find the Right Bond at the Right Time

    Learn about the types of bonds you should consider investing in, when you should be buying them and how to compare yields against their time to maturity.
  4. Investing

    Corporate Bond Basics: Learn to Invest

    Understand the basics of corporate bonds to increase your chances of positive returns.
  5. Investing

    6 Ways That Investors Use Bonds

    Learn how the stodgy stereotype of bonds can overshadow the basic and advanced uses of what these investments can do for your portfolio.
  6. Investing

    Corporate Bonds: Advantages and Disadvantages

    Corporate bonds can provide compelling returns, even in low-yield environments. But they are not without risk.
  7. Investing

    The Top 5 Bond Mutual Funds for 2016

    Learn about bond mutual funds that investors may want to consider for 2016. Understand why the risk of rising interest rates is a concern heading into 2016.
  1. What determines bond prices on the open market?

    Learn more about some of the factors that influence the valuation of bonds on the open market and why bond prices and yields ... Read Answer >>
Trading Center