Definition of Average life:
Average period before the principal of a debt security (bond, debenture, note) is scheduled to be repaid. It is used in comparing debt securities of different maturities and different repayment schedules. See also half life.
The average life is the length of time the principal of a debt issue is expected to be outstanding. Average life does not take into account interest payments, but only principal payments made on the loan or security. In loans, mortgages, and bonds, the average life is the average period of time before the debt is repaid through amortization or sinking fund payments.
Alternative term for economic life.
Investors and analysts use the average life calculation to measure the risk associated with amortizing bonds, loans, and mortgage-backed securities. The calculation gives investors an idea of how quickly they can expect returns and provides a useful metric for comparing investment options. In general, most investors will choose to receive their financial returns earlier and will, therefore, choose the investment with the shorter average life.
How to use Average life in a sentence?
- Most investors will choose an investment with a shorter average life as this means they will receive their investment returns sooner.
- Prepayment risk occurs when the loan borrower or bond issuer repays the principal earlier than scheduled, thereby shortening the investment's average life and reducing the amount of interest the investor will receive.
- The average life calculation is useful for investors who want to compare the risk associated with various investments before making an investment decision.
- The average life is the average length of time it will take to repay the outstanding principal on a debt issue, such as a Treasury bill, bond, loan, or mortgage-backed security. .
Meaning of Average life & Average life Definition