How to calculate average maturity including cash?

Discussion of the Bond portion of the Permanent Portfolio

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thisisallen
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How to calculate average maturity including cash?

Post by thisisallen » Thu Dec 27, 2018 5:46 pm

Sometimes a person will post that they are using/including cash in their calculation of the average maturity of the bond portion of the PP. For example, the person says that he has a barbell of LTT and cash that equals a intermediate term bond maturity. Is there a formula to calculate the average maturity when cash, having a maturity of 0, is included?

This is from Investopedia:
“How Weighted Average Maturity Is Computed
Assume, for example, that an investor owns a $30,000 portfolio, which includes three bond holdings. Bond A is a $5,000 bond (16.7% of the total portfolio) and matures in 10 years, and bond B is a $10,000 investment (33.3%) that matures in six years. The investor also owns bond C, a $15,000 bond (50%) with a maturity of four years. To compute WAM, each of the percentages is multiplied by the years until maturity, so the investor can use this formula: (16.7% X 10 years) + (33.3% X 6 years) + (50% X 4 years) = 5.67 years, or about five years, eight months.”

If a % of cash is used in the formula then that part of the formula will always be 0. In that case the average maturity will no5 be calculated properly, would it?

Is the question clear?
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ochotona
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Re: How to calculate average maturity including cash?

Post by ochotona » Thu Dec 27, 2018 5:51 pm

My understanding is that you care about duration, not maturity. They are related but not the same. Furthermore, my understanding is that you can take a weighted average of durations to find the bond portfolio duration. Duration of bond funds is published by the issuers.
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buddtholomew
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Re: How to calculate average maturity including cash?

Post by buddtholomew » Thu Dec 27, 2018 6:16 pm

Yes, TLT publishes effective duration daily on iShares.com

Use this formula to calculate weighted duration (% of total * duration). For example:

TLT - $1500, duration 17.40
Cash - $3500, duration 0 (cash has 0 duration in my calcs)
Total - $5000

TLT = $1500/$5000 or .30*17.40 = 5.22
Cash = $3500/$5000 or .70*0 = 0 (yes x*0 = 0)

5.22 + 0 = 5.22 (weighted duration)
Or
5.22 + .7 = 5.92 (if you assign cash a duration of 1.00)
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Xan
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Re: How to calculate average maturity including cash?

Post by Xan » Thu Dec 27, 2018 8:12 pm

Allen,

I believe maturity would be calculated correctly if you used zero in the formula you gave. You're right that "that part" of the formula will always be zero, but the amount that's zero will be the percentage of your portfolio that's in cash. That's exactly what you're looking for!
thisisallen
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Re: How to calculate average maturity including cash?

Post by thisisallen » Thu Dec 27, 2018 10:05 pm

Many thx for the replies and understandings and example.

Fortunately iShares provides the duration of TLT at their site. I have individual bonds so a special formula is required for calculating the duration of a single bond. I saw that there are online calculators for this and it can likely be done in Excel.

Thx again
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