Adjusted Maturity vs. Average Weighted Maturity

by Sue-Lynn Carty

Adjusted maturity can refer to the adjusted to constant maturity, also referred to as the adjusted to equivalent maturity and inflation adjusted principal at maturity. The average weighted maturity refers to the average amount of time to redemption for multiple securities in one fund or portfolio.

Adjusted to Constant Maturity

The adjusted to constant maturity is most often used when determining the average yield for U.S. Treasury Securities. The U.S. Treasury publishes these yields in the One-Year Constant Maturity Treasury Rate Index (One-Year CMT). The One Year CMT is the estimated average yield for U.S. Treasuries when adjusted to an equivalent maturity of one year. This estimated average is based on the yields of four-, 13- and 26-week Treasury bills and two-, three-, five -and 10-year Treasury notes most recently sold at auction.

Adjusted Principal at Maturity

The adjusted principal at maturity is most often used when determining the value of Treasury Inflation Protected Securities (TIPS). The adjusted principal at maturity is the TIPS principal value after accounting for inflation. If inflation results in a decrease in the par value of TIPS at maturity, then the U.S. Treasury pays the investor the difference between the adjusted principal at maturity and the TIPS par value.

Average Weighted Maturity

The average weighted maturity is most often used in mutual fund and bond fund portfolios. It is the weighted average of the maturity dates of all securities in the portfolio and represents the average time to maturity of all the securities in the portfolio as a whole. For fixed-income funds and securities, the average weighted maturity represents the average length of time to redemption for all fixed-income securities in the fund.

Average Weighted Maturity Purpose

Investors calculate the average weighted maturity for fixed-income securities and bond funds as a way to measure their exposure to interest rate risk. Generally, the longer the average weighted maturity of a fixed-income security or bond fund, the great the exposure to interest rate risk. The opposite is also typically true. When the average weighted maturity of is shorter, the less exposure to interest rate risk.

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