Final answer:
Mortgage-backed Securities are traded based on their average life because underlying mortgage loans may be paid off early, varying their actual lifespans. The option (B) is correct.
Step-by-step explanation:
The investments that are generally traded according to their average life rather than their stated maturity date are Mortgage-backed Securities (MBS). Unlike Treasury Bonds, Corporate Bonds, or Municipal Bonds, Mortgage-backed Securities are comprised of pooled mortgages that have varying lifetimes due to factors like prepayment from homeowners.
Because the underlying loans can be paid off early, investors consider the average life of the MBS, which represents the weighted average time to receive all the anticipated payments, both interest and principal. This average life is a more accurate representation of when the funds invested in MBS will be returned compared to the stated maturity date of individual mortgage loans comprising the security. Therefore, option (B) is correct.