Weighted average life of bonds

How do I find the weighted average life span of a bond?

Hi there,

Bonds which amortize principal are not widely used in Switzerland. If you want to find the weighted average life of an amortizing bond, you need to follow these steps:

1. Mutliply each amortization payment by its amortization term. Example: If a 3-year bond amortizes its principal at the rate of CHF 1000 per year, multiply the first CHF 1000 by 1 year (CHF 1000), the second CHF 1000 by 2 years (CHF 2000) and the third CHF 1000 by 3 years (CHF 3000).

2. Add the time-weighted results. In this example you would add CHF 1000, CHF 2000 and CHF 3000 for a sum of CHF 6000.

3. Add all amortization payments separately to find the bond's total principal. In this example you would add CHF 1000, CHF 1000 and CHF 1000 for a sum of CHF 3000.

4. Divide the combined time-weighted result by the combined amortization payments. In this example you would divide CHF 6000 (time-weighted) by CHF 3000 (principal). The weighted average life of the bond in the example is 2 years.

In the above example, the average time it takes for each 1 Swiss francs of principal to be repaid is 2 years.

Best regards from Moneyguru

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