What is ‘Yield To Average Life’
The yield on a fixed-income security when the average maturity is substituted for the maturity date of the issue. It is particularly useful when a bond has a sinking-fund feature, as average life in this case may be significantly less than the actual number of years until maturity.
Explaining ‘Yield To Average Life’
Yield to average life enables the investor to estimate the actual return from a bond investment, regardless of the actual maturity. 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.
Yield-To-Average Life
What is ‘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.
Explaining ‘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).
Further Reading
- The relationship between yield, risk, and return of corporate bonds – www.jstor.org [PDF]
- Some lessons from the yield curve – www.aeaweb.org [PDF]
- A comparison of alternative models for pricing GNMA mortgage-backed securities – www.jstor.org [PDF]
- Effects of unconventional monetary policy on financial institutions – www.nber.org [PDF]
- On the determinants of yield spreads between mortgage pass-through and Treasury securities – link.springer.com [PDF]
- Yields on privately placed corporate bonds – www.jstor.org [PDF]
- Some formal connections between economic values and yields and accounting numbers – onlinelibrary.wiley.com [PDF]
- Economic measures of tourism yield: what markets to target? – onlinelibrary.wiley.com [PDF]
- Do natural phenomena affect stocks' yield in Israel? – www.tandfonline.com [PDF]
