Term: Average Life (Bond/Loan Term)

Field: Bond/Loan Term

Definition:
It is a way to look at the term of a loan or bond that accounts for principal pay downs. If a loan is interest only with a full balloon at the end, the average life will equal the maturity. If there is amortization, principal is being paid over the life of the loan, decreasing the balloon payment and the average life. This number is then used to find the treasury that has the closest remaining term, but is not shorter. For example, a 10/25 loan has an average life of 9 years. 9 years from today is October 2008. The current list of outstanding, non-callable US treasury securities with maturities in 2008 includes March 2008, June 2008, September 2008 and a December 2008. The lender would choose the December 2008 because it is longer than the actual due date.