A human: 85 years. A Galapagos turtle: 400+. A bond portfolio? All over the map.
So you're buying into a mutual fund carrying bonds only rated BBB. Because they're somewhat risky, they carry an interest rate premium, which makes you happy. But you're worried about inflation taking off in three or four years, so you care a lot about the average life of the bonds in the portfolio. If the average life was two and a half years, and most of the bonds came due in four years or less, then you could probably sleep like a baby every night.
But if the average life is more like 15, 16, 20 or 30 years, then if inflation hits in just four years, those bonds will go down a ton.
The other name for average life is "weighted average maturity," or "weighted average life." So what is being weighed here? Answer: the dollar amount of the principal of the bond. That is, you could have a portfolio with just three bonds. One is a billion dollars, another is ten million, and another is two million. Well, the vast majority of this portfolio's value will be driven by that billion-dollar bond. It carries an extremely high weighting in this average life calculation.
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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