When you enter an instrument which supports multiple coupons, for each leg separately you can instruct SDX Interest Rates to automatically amortize the notional for each payment by a set amount or by a predefined percentage. You do this via the Cash Flow Dates window (accessed by clicking the Cash Flow & Dates button).
If you have defined an amortized notional for either or both legs of an instrument, you can also choose to display its average life value. The average life value shows the effective maturity for the amortized leg in years.
It is important to note that:
The average life is only displayed if you have first enabled this feature via the Settings window > Default Settings tab > General tab > Show Average Life radio button.
For more information on the customization settings, see Customizing Your Default Settings
The average life value is currently only displayed for the vanilla swap and the general swap for which you have defined an amortized notional for either or both legs (via the Cash Flow Dates window which is accessed by clicking the Cash Flow & Dates button).
How is the average life amount calculated?
It is calculated as follows:
Where:
AL is the average life
is the principal repaid (or canceled) at time t
t is the time measured in years
m is the number of payments per year
IP is the initial principal (i.e., the principal at the start of the swap)
Which legs is the average life result calculated for?
For each instrument, the average life is only calculated for one amortized leg, according to the following rules:
If there is no amortization applied to either leg, no average life result is displayed.
If only one leg is amortized, the average life result is displayed for that leg.
If both legs are amortized then:
If one leg is fixed and one if floating, the average life result is displayed for the fixed leg.
If both legs are fixed or both legs are floating, the average life result is displayed for the left leg
In the:
Single Option page the average life result is shown next to the notional of the relevant leg (as seen in the image below):
Portfolio page the average life result is displayed in the Results area (as seen in the image below). It is important to note that in order to see this result, after setting the notional to amortize in the Cash Flow Dates window, you must then click Calculate in the Portfolio page.