What Is Weighted Average Maturity (WAM)?
Weighted average maturity (WAM) is the weighted average amount of time until the mortgages in a mortgage-backed security (MBS) mature. This term is used more broadly to describe maturities in a portfolio of debt securities, including corporate debt and municipal bonds. The higher the WAM, the longer it takes for all of the mortgages or bonds in the portfolio to mature.WAM is used to manage debt portfolios and to assess the performance of debt portfolio managers.
WAM is closely related to weighted average loan age (WALA).
Key Takeaways
- Weighted average maturity (WAM) is a measure of the overall maturity of the mortgages pooled in a mortgage-backed security (MBS).
- A longer WAM implies somewhat greater interest rate and credit risk than MBS with shorter WAMs.
- WAM is the inverse of another popular MBS duration metric: weighted average loan age (WALA).
Understanding Weighted Average Maturity
WAM is calculated by computing the percentage value of each mortgage or debt instrument in the portfolio. The number of months or years until the bond’s maturity is multiplied by each percentage, and the sum of the subtotals equals the weighted average maturity of the bonds in the portfolio.
WAM is used as a tool to manage bond portfoliosand to assess the performance of portfolio managers. Mutualfunds, for example, offer bond portfolios with a variety of WAM guidelines, and a fund portfolio may have a WAM as short as five years or as long as 30 years. The investor can choose a bond fund that matches a particular investing time frame. The fund’s investment objective includes a benchmark, such as a bond index, and the benchmark portfolio’s WAM is available for investors and portfolio managers. A portfolio manager’s investment performance is judged based on the rate of return and the WAM on the fund’s bond portfolio.
Tip
Bond laddering is an investment strategy that involves purchasing bonds with different maturity dates, which means that the dollars in the portfolio are returned to the investor at different points over time. A laddering strategy allows the owner to reinvest bond maturity proceeds at current interest rates over time, which reduces the risk of reinvesting the entire portfolio when interest rates are low. Bond laddering helps an income-oriented investor maintain a reasonable interest rate on a bond portfolio, and these investors use WAM to assess the portfolio.
Example of How WAM Is Computed
Assume, for example, that an investor owns a $30,000 portfolio, which includes three bond holdings.
- Bond A is a $5,000 bond (16.7% of the total portfolio) and matures in 10 years
- Bond B is a $10,000 investment (33.3%) that matures in six years.
- Bond C, a $15,000 bond (50%) with a maturity of four years.
To compute WAM, each of the percentages is multiplied by the years until maturity, so the investor can use this formula: (16.7% X 10 years) + (33.3% X 6 years) + (50% X 4 years) = 5.67 years, or about five years, eight months.
Weighted Average Maturity vs. Weighted Average Loan Age
Weighted average maturity(WAM) and weighted average loan age (WALA) are both used to estimate the likelihood of an investment in a mortgage-backed security being profitable. However, WAM tends to be a more broadly used measure for the maturity of pools of mortgage-backed securities. It measures the average time it takes for securities in a debt portfolio to mature, weighted in proportion to the dollar amount invested in the portfolio. Portfolios with higher weighted average maturities are more sensitive to interest rate changes.
WALA is actually calculated as the inverse of WAM: WAM computes the percentage value of each mortgage or debt instrument in the portfolio. The number of months or years until the bond’smaturityis multiplied by each percentage, and the sum of the subtotals equals the weighted average maturity of the bonds in the portfolio.
What Is a Mortgage-Backed Security?
A mortgage-backed security (MBS) is a collection of mortgages pooled together and sold as an investment product. Investors purchase shares which provide payments similar to those of bonds.
How Is Weighted Average Maturity Different From Weighted Average Loan Age?
WALA is the inverse of WAM. It is calculated by multiplying the initial value of each mortgage by the number of months since the loan was originated.
What Is the Purpose of Weighted Average Maturity?
WAM helps estimate the likelihood of an investment in an MBS being profitable. By knowing the WAM, an individual can invest in a fund that fits his desired time frame.
The Bottom Line
Weighted average maturity measures the time before securities in a portfolio mature in proportion to how much is invested in that portfolio. A shorter WAM typically suggests less risk and a lower interest rate. The inverse of weighted average maturity is weighted average loan age.
FAQs
Generally, the Weighted Average Maturity of a Bond Issue is the sum of the product of the Issue Price of each maturity of the Bond Issue multiplied by the number of years from the Closing until that Maturity Date divided by the Issue Price of the entire Bond Issue.
What is weighted average maturity and weighted average life? ›
Weighted average maturity measures the time before securities in a portfolio mature in proportion to how much is invested in that portfolio. A shorter WAM typically suggests less risk and a lower interest rate. The inverse of weighted average maturity is weighted average loan age.
Why is weighted average maturity important for an investor? ›
Understanding weighted average maturity
Why is the WAM important? Well, it can give investors a good idea of the riskiness of a portfolio. For example, a portfolio with a WAM of 10 years will be more sensitive to interest rate changes than a portfolio with a WAM of 5 years.
What is the weighted average maturity of an amortizing loan? ›
The weighted average maturity, is a measure of how quickly principal will be repaid according to the bond's debt service structure. Is the life of the debt longer than the life of the asset? Is the weighted average life of the debt longer than the average life of the assets?
What is the difference between WAM and WAL? ›
For money market mutual funds, the difference between WAM and WAL is that WAM takes into account interest rate resets and WAL does not. The SEC limits the WAL for money market mutual funds to 120 days. Duration: A measure of the price sensitivity of a bond fund or debt instrument to a change in interest rates.
What is the difference between weighted average maturity and duration? ›
Maturity is the time remaining until the bond's principal is repaid. A bond with a 10-year maturity will return the principal to the investor in 10 years. Meanwhile, duration measures a bond's sensitivity to interest rate changes, and reflects the weighted average time it takes to receive all cash flows from the bond.
What is the weighted average maturity to reset? ›
Weighted average maturity to reset for each underlying position held is calculated by taking the position's market value, multiplied by the number of days to next rate reset, divided by the total portfolio's ending market value.
How do you calculate your WAM? ›
Your WAM is calculated by multiplying each unit of study mark by its credit point value, then adding these totals together. You then divide this by the sum of all credit points attempted. All units have an equal weighting of one. All units that are allocated a mark contribute to your WAM.
How to calculate a weighted average and why it matters to investors? ›
Key Takeaways
In a weighted average, each data point value is multiplied by the assigned weight, which is then summed and divided by the number of data points. A weighted average can improve the data's accuracy. Stock investors use a weighted average to track the cost basis of shares bought at varying times.
How do you calculate weighted average maturity in Excel? ›
To calculate the weighted average in Excel, you must use the SUMPRODUCT and SUM functions using the following formula: =SUMPRODUCT(X:X,X:X)/SUM(X:X) This formula works by multiplying each value by its weight and combining the values. Then, you divide the SUMPRODUCT but the sum of the weights for your weighted average.
To calculate the Weighted Average Accumulated Expenditures (WAAE), list all expenditures made towards the construction of the asset during the accounting period, then multiply each expenditure by the portion of the period that the money was actually employed in the construction process.
What is an example of a weighted average interest rate? ›
Each loan's interest rate contributes to the weighted average in proportion to the loan's percentage of the total debt. For example, suppose you have two loans, $5,500 at 4.529% and $6,500 at 2.75%. The simple average of the interest rates is (4.529% + 2.75%) / 2 = 3.6395%.
How do you calculate weighted average? ›
Simply, in order to find the weighted average, one must first multiply all values in the data set by their corresponding weights. Then, add up the resulting products and divide by the sum of the weights. When dealing with percentages, one will usually find that the sum of weights is equal to 1 or 100%.
What is the weighted average maturity? ›
Generally, the Weighted Average Maturity of a Bond Issue is the sum of the product of the Issue Price of each maturity of the Bond Issue multiplied by the number of years from the Closing until that Maturity Date divided by the Issue Price of the entire Bond Issue.
What does WAM mean in finance? ›
Weighted average maturity (WAM) is the average time until a portfolio's securities mature, weighted in proportion to the amount invested in the portfolio. Mortgage-Backed Securities (MBS): Definition and Types of Investment.
Which is better actively managed funds or index funds? ›
Many investment strategists believe index funds should be a core component of a retirement portfolio. Because they don't require active management, the fees and the expense ratios of index funds tend to be lower, which means they can often outperform higher-cost funds, even without beating them.
What is weighted average maturity years? ›
Generally, the Weighted Average Maturity of a Bond Issue is the sum of the product of the Issue Price of each maturity of the Bond Issue multiplied by the number of years from the Closing until that Maturity Date divided by the Issue Price of the entire Bond Issue.
What is average weighted lifetime? ›
The weighted average life (WAL) is the average length of time that each dollar of unpaid principal on a loan, a mortgage, or an amortizing bond remains outstanding.
What does average maturity mean? ›
Average maturity is a financial term that refers to the average length of time until a group of loans or securities held by an investor or institution matures or is repaid.
What is the weighted average maturity of a company? ›
WAM is calculated by multiplying the time to maturity of each security by the proportion of the portfolio invested in that security, and then summing these values for all securities in the portfolio. This weighted average is then divided by the total amount invested in the portfolio.
