How to calculate average maturity including cash?
Posted: 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?
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?