We are independent & ad-supported. We may earn a commission for purchases made through our links.

Advertiser Disclosure

Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.

How We Make Money

We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently from our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.

What Is Yield-To-Average Life?

By Toni Henthorn
Updated May 16, 2024
Our promise to you
SmartCapitalMind is dedicated to creating trustworthy, high-quality content that always prioritizes transparency, integrity, and inclusivity above all else. Our ensure that our content creation and review process includes rigorous fact-checking, evidence-based, and continual updates to ensure accuracy and reliability.

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

Editorial Standards

At SmartCapitalMind, we are committed to creating content that you can trust. Our editorial process is designed to ensure that every piece of content we publish is accurate, reliable, and informative.

Our team of experienced writers and editors follows a strict set of guidelines to ensure the highest quality content. We conduct thorough research, fact-check all information, and rely on credible sources to back up our claims. Our content is reviewed by subject matter experts to ensure accuracy and clarity.

We believe in transparency and maintain editorial independence from our advertisers. Our team does not receive direct compensation from advertisers, allowing us to create unbiased content that prioritizes your interests.

Companies that want to raise capital may elect to sell bonds. Sinking funds are bond funds designed so that the company regularly repurchases or retires a portion of the outstanding bonds throughout the life of the issue. As such, the yield of bonds in a sinking fund will not be equal to yield to maturity, since some of the bonds will be retired early. The yield-to-average life calculates the expected yield of a fund by using the average number of years that a bond will be outstanding. By using the yield-to-average life, a bond investor can anticipate more accurately his return on a bond investment with a sinking fund requirement.

For example, imagine a company issues bonds to raise $100,000 U.S. Dollars (USD) with a par value of $100 USD and a five-percent coupon that is payable annually. A sinking fund is incorporated into the terms of the bond with a fixed redemption schedule of 20 percent per year at the par value over five years. Armed with this information, an investor can determine that the yield-to-average life for this investment is four percent annually with an average life of three years. The yield-to-average life falls short of the yield to maturity due to the 20 percent early retirement each year.

To perform the calculation for yield-to-average life, the investor first multiplies the percentage redeemed each year by the redemption payment and the number of years invested. At the end of the each year, the corporation redeems 20 percent of the bonds for $105 USD ($100 USD principal + $5 USD interest). According to the formula, percent redeemed X redemption payment X years, the values obtained for each year are 21, 42, 63, 84, and 105 for a total of 315. This total is divided by (21 X five years), or 105, to produce an average duration of three years. At a coupon rate of five percent for three years, bearing in mind the 20 percent reduction in principal per year, the total yield-to-average life is 12 percent or four percent per year.

Yield-to-maturity is the most common form of earnings calculation. A major drawback to yield-to-maturity formula is that it assumes that the principal will be invested at the same interest rate as the redemptions become due. In actuality, this is rarely true. Even if a conventional bond is held to maturity, the actual yield may differ from the yield-to-maturity. The yield-to-maturity, just like the yield-to-average life, is only an anticipated outcome that depends on interest rate fluctuations.

SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.

Discussion Comments

SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.

SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.