Glossary of Municipal Securities Terms

AVERAGE LIFE

With respect to an issue of bonds, the weighted period of time required to repay half of the issue through scheduled principal payments (e.g., maturity, sinking fund redemption, etc.). The average life, also referred to as the “weighted average life” or “weighted average maturity” or “WAM,” is a reflection of the rapidity with which the principal of an issue is expected to be paid. Under one commonly used calculation method, average life is equal to the total bond years divided by the total number of bonds (one bond equals $1,000 par amount, regardless of actual denomination). Note that this computation method does not take into account the time value of the principal amounts. The formula for this computation is:

Average life  =  Total Bond Years
                       Number of Bonds

EXAMPLE:

For each maturity, bond years  =  amount maturing in that year X number of years from closing to maturity.

 PERIOD

 PRINCIPAL 

 BOND YEARS 

 1

 2,000,000

 2,000,000

 2

 4,000,000

 8,000,000

 3

 6,000,000

 18,000,000

 

 12,000,000

 28,000,000

Average Life  =   28,000,000   =  2.333 years
 12,000,000

See: BOND YEAR; EXPECTED AVERAGE LIFE; PLANNED AMORTIZATION CLASS BOND; SINKER; SPEED.

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