Yield to Average Life

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Definition of 'Yield to Average Life'

The yield to average life (YAL) is a measure of the return on an investment that takes into account both the interest income and the principal repayments. It is calculated by finding the discount rate that makes the present value of the future cash flows equal to the current price of the investment.

The YAL is often used to compare investments with different maturities, as it provides a way to compare the returns on investments that make different payments at different times. For example, an investment that pays a fixed interest rate for 10 years will have a higher YAL than an investment that pays the same interest rate for 5 years, because the 10-year investment will make more payments in total.

The YAL can also be used to compare investments with different coupon rates. For example, an investment that pays a 10% coupon rate will have a higher YAL than an investment that pays a 5% coupon rate, because the 10% investment will make more interest payments in total.

The YAL is a useful tool for investors who are looking for a way to compare investments with different maturities and coupon rates. However, it is important to note that the YAL does not take into account the risk of the investment. Therefore, investors should also consider the risk of the investment when making their decision.

Here is a more mathematical definition of the yield to average life:

The yield to average life is the internal rate of return (IRR) of an investment that makes a series of equal payments. The payments are made at regular intervals, and the IRR is the discount rate that makes the present value of the payments equal to the initial investment.

The yield to average life can be calculated using the following formula:

```
YAL = (A1 + A2 + ... + An) / n
```

where:

* YAL is the yield to average life
* A1, A2, ..., An are the payments made at the end of each period
* n is the number of periods

The yield to average life is a useful tool for comparing investments with different maturities and payment schedules. It can also be used to estimate the return on an investment that is expected to make a series of equal payments.

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