Weighted Average Maturity (I.R.C. 147(b))

General Discussion

IRS Form 8038 (and certain other information returns for other types of issues) requires the identification of the “weighted average maturity” of the bonds.  Form 8038 defines weighted average maturity as follows:

[…] the weighted average maturity is the sum of the products of the issue price of each maturity and the number of years to maturity (determined separately for each maturity and by taking into account mandatory redemptions), divided by the issue price of the entire issue […]

See also the definition of “weighted average maturity” in Treas. Reg. 1.1273-1(e)(3).

Certain Issues Concerning Weighted Average Maturity

It is clear that mandatory redemptions identified for the bonds in the bond documents must be considered.  It is not clear whether mandatory redemptions required only by bank documents (for example, in continuing covenant agreements or reimbursement agreements) should be taken into account for calculation purposes.  Mandatory redemptions in bank documents frequently state that such redemptions are to be effected by the issuer pursuant to the optional redemption provisions contained in the bond documents. If the redemptions in such documents are required of the borrower and not the issuer (such as is often the case in continuing covenant agreements), and such redemptions are not required by the bonds themselves, then the redemptions should not typically be included in the weighted average maturity calculations.

In a transaction with bonds and registered coupons, how are the registered coupons treated for purposes of the WAM calculation? Some bond counsel will include the full “par” maturity value on the principal payment date on which the coupon is paid, which translates to an issue price taking into account the applicable sale price.  Other bond counsel may have a different approach to otherwise try to distinguish between the actual principal component of the payment on the maturity date versus the interest payment amount.  Those counsel may, for instance, show only the issue date amount of the coupon in the principal column, the differential between issue price and maturity value in the interest column, and a price of 100%.  It’s not clear what method is correct.  It may be least incorrect to use the latter method where the amount in the principal column and the interest column equal the maturity value of the coupon.

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