MEANING of ‘Yield To Typical Life’

The yield on a fixed-income security when the typical maturity is substituted for the maturity date of the issue. It is especially helpful when a bond has a sinking-fund function, as average life in this case might be substantially less than the real number of years till maturity.

BREAKING DOWN ‘Yield To Typical Life’

Yield to typical life enables the investor to estimate the actual return from a bond investment, no matter the actual maturity. The yield to average life estimation presumes that the bond develops on the day offered by its typical life and at the typical redemption rate instead of the par rate.

Yield-To-Average Life

MEANING of ‘Yield-To-Average Life’

The yield computation of a bond that is methodically retired throughout its life. This yield changes the specified last maturity with the typical life maturity. The yield-to-average life computation is frequently used in the case of a sinking fund where the provider acquires its own bonds on the free market to fulfill its sinking fund commitments when the bonds are trading listed below par.

BREAKING DOWN ‘Yield-To-Average Life’

The yield-to-average life enables investors to identify the anticipated return when a bond is not held to maturity either due to the fact that of sinking fund obligations or, in the case of mortgage-backed securities (MBS), since of the prepayment of the hidden mortgage debt. The yield-to-average life metric is utilized in regard to the rates of mortgage-backed securities, such as collateralized home loan commitments (CMOs) provided by the Federal Mortgage Corporation and private issuers. Because an MBS usually repays principal throughout the life of the financial investment, the prepayment of the hidden home mortgage debt can affect the financier’s return (depending on whether the MBS was purchased at a discount or at a premium).

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