Average Effective Maturity
- For a single bond, it is a measure of maturity that takes into account the possibility that a bond might be called back to the issuer.
For a portfolio of bonds, average effective maturity is the weighted average of the maturities of the underlying bonds. The measure is computed by weighing each bond's maturity by its market value with respect to the portfolio and the likelihood of any of the bonds being called. In a pool of mortgages, this would also account for the likelihood of prepayments on the mortgages.
This measure is a more accurate way to get a feel for the exposure of a single bond or portfolio. Particularly in the case of a portfolio of bonds or other debt, a simple average could be a very misleading measure. Knowing the average maturity of the portfolio is essential to knowing the interest rate risks faced by that portfolio.
Investment dictionary. Academic. 2012.
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