Average Effective Maturity

When do the bonds mature in a given portfolio of bonds? Some come due in five years; some in 10; some in 30; some in 18 months...so what's the average? And why would we care?

Well, the more long-dated the bonds, the more volatile they will be as interest rates shift around. Like if a bond coming due pays 5% interest and suddenly the Fed, panicking that inflation is eight minutes away, raises rates 300 basis points and indicates 500 points soon...then bond prices of equivalent risk might rocket to yield 10%. At that point, your lousy little five-percenter looks terrible.

The good news? It comes due and pays cash in just six months, so the damage should be minimal. After six months of suffering, you have your cash back and can do whatever you want with it. But if you have a 30-year duration or effective maturity bond, then...um...ouch. Not the 50 Shades kind, either. You'll have to suffer an interminably long time before you feel good about your paltry 5% yield in a 10% world.