5.3.1.7. Yield to Average Life
Bonds that have a sinking fund agreement require the issuer to set funds aside sufficient to redeem the issue prior to maturity. Often a set percentage of the issue is required to be retired each year. Yield to average life is the yield calculation for sinking fund bonds to substitute for yield to maturity when the bonds are trading below par.
The average life of a sinking fund bond is the point where half the bonds are expected to be redeemed by the issuer as a result of the sinking fund. If the bond requires a set portion of the issue to be redeemed annually, average life can be easily determined. If no such requirement exists, average life is estimated by the amount of annual payments required to be paid into the sinking fund.
With yield to average life, average life substitutes for time to maturity in calculating yield in order t