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until maturity, the average weighted life is the time remaining
to maturity.
The following example illustrates how Mr. Scribner’s
calculated the average weighted life for ND:
Years Principal
Date Outstanding (A) Payment (B) (A*B)/11,363,0001
1/1/1985 -- -- --
11/1/1985 0.8333 $1,407,703 0.10
11/1/1986 1.8333 9,954,795 1.61
Total average weighted life 1.71
1 This figure is the total principal outstanding on ND as of
Dec. 31, 1984.
Mr. Scribner estimated that ND had an average weighted life of
1.71 years, or 1 year, 9 months.
When an issuer holds an option to repay debt, Mr. Scribner’s
report explains that the option may affect the average weighted
life because the issuer may elect to redeem the instrument before
maturity. Petitioner would elect to exercise an option to repay
debt before maturity if it would save interest expense. For
example, petitioner would exercise the option to redeem the
instrument before maturity when the interest rate of the
instrument exceeded the market rate.
Similarly, if the holder of a debt has a put option, the
holder will exercise the option when the debt obligation pays
interest at a rate below the market rate of interest because the
20(...continued)
principal paid.
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