Average Effective Maturity
When do the bonds mature in a given portfolio of bonds? Some come due in five years; some in 10; some in 30; some in 18 months...so what's the average? And why would we care?
Well, the more long-dated the bonds, the more volatile they will be as interest rates shift around. Like if a bond coming due pays 5% interest and suddenly the Fed, panicking that inflation is eight minutes away, raises rates 300 basis points and indicates 500 points soon...then bond prices of equivalent risk might rocket to yield 10%. At that point, your lousy little five-percenter looks terrible.
The good news? It comes due and pays cash in just six months, so the damage should be minimal. After six months of suffering, you have your cash back and can do whatever you want with it. But if you have a 30-year duration or effective maturity bond, then...um...ouch. Not the 50 Shades kind, either. You'll have to suffer an interminably long time before you feel good about your paltry 5% yield in a 10% world.
Related or Semi-related Video
Finance: What is Term To Maturity?12 Views
finance a la shmoop what is term to maturity alright people well it's kind
of a lifecycle of a bond like a bond is issued or sold it has an assay a 15 year [Bond timeline appears]
duration somebody's written that money for 15 years its term to maturity when
it first was issued was 15 years but if you bought that bond nine years into it
some you know maturation process when all the hairs growing in funny places [Hairs grow out of bond]
then at that point it would have six years current maturity well what goes on
between these years interest payments and then eventually at the very end the
issuer pays back the principal to the investor who bought the bond and [Money transfers from issuer to investor]
everyone goes away happy-ish well bonds carry gradations in short medium and
long term terms to maturity like short term generally is considered one to five [Different types of bond appear]
years mid term medium term and something like that is like five to a dozen years
and long term is like up to you know thirty or even a hundred years after
that dozen or so no hard lines here they're all dotted and yeah Disney [Man discussing bonds at DisneyLand]
actually sold a hundred year bonds at one point and they are of course the
happiest bonds on earth [Disney bonds appear]
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