Average Life

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Number of years until the date when one-half of each dollar of principal value in a security will be paid. Average life is a shorthand method of computing a bond's retirement date, which determines its Yield to Maturity. This calculation is only an approximation, as it depends on borrower prepayments and other factors. For example, some 30-year conventional mortgages will prepay much faster than others. Half lives of corporate and municipal bonds frequently are determined by prepayments into a Sinking Fund. Also called Weighted Average Life in mortgage backed securities or Average Maturity in corporate and municipal bonds. See also Cash Flow Yield; Duration; Half Life.

Average Life

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Home > Library > Business & Finance > Investment Dictionary

An estimate of the number of terms to maturity, taking the possibility of early payments into account. Average life is calculated using the weighted average time to the receipt of all future cash flows.

Investopedia Says:
This is often used in sinking funds.

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