What is weighted average maturity (WAM)?
The weighted average period until the mortgage maturities in a mortgage-backed instrument (MBS) is known as the weighted average maturity, or WAM. This phrase is used more widely when referring to the maturities of a portfolio of debt assets, such as corporate and municipal bonds. The longer it takes for all the bonds or mortgages in the portfolio to mature, the greater the WAM. Debt portfolio managers’ performance is evaluated, and debt portfolios are managed using WAM.
Recognizing Average Weighted Maturity
The percentage value of each mortgage or other loan instrument in the portfolio is used to compute WAM. The weighted average maturity of the bonds in the portfolio is equal to the sum of the subtotals multiplied by the number of months or years left before the bond’s maturity.1 Bond portfolio management and portfolio manager performance evaluation are accomplished using WAM. For instance, bond portfolios offered by mutual funds come with a range of WAM standards; a fund portfolio’s WAM might be as short as five years or as long as thirty years. An investor may choose a bond fund corresponding to a particular investment horizon. The benchmark portfolio’s weighted average market value (WAM) is accessible to investors and portfolio managers, and the fund’s investment goal incorporates a benchmark, like a bond index. The portfolio manager’s performance is evaluated by looking at the bond portfolio’s WAM and rate of return.
Buying bonds with varying maturity dates is known as bond laddering, and it is an investing technique that allows the investor to get their money back from the portfolio at various intervals throughout time. By gradually allowing the owner to reinvest bond maturity proceeds at current interest rates, a laddering technique lowers the risk of reinvesting the whole portfolio during a period of low interest rates. Income-oriented investors utilize bond laddering to keep their bond portfolios at an acceptable interest rate, and they evaluate their portfolios using weighted average market measures (WAM).
An Example of the Calculation of WAM
Let us use an example where an individual has three bond holdings totaling $30,000.
- Bond A is a $5,000 bond with a 10-year maturity period (16.7% of the overall portfolio).
- Ten thousand dollars (33.3%) is invested in Bond B, which matures in six years.
- Bond C is a 50% $15,000 bond with a four-year maturity.
The investor may use the following method to calculate WAM: each percentage multiplied by the number of years before maturity (16.7% times ten years plus 33.3% times six years plus 50% times four years) is 5.67 years, or around five years and eight months.
Comparing Weighted Average Loan Age with Weighted Average Maturity
The possibility of a successful investment in a mortgage-backed asset is estimated using weighted average maturity (WAM) and weighted average loan age (WALA). WAM is often a more widely used metric for the maturity of mortgage-backed securities pools. It calculates the average maturity date of the assets in a debt portfolio, weighted according to the total amount invested. Interest rate fluctuations have a more significant impact on portfolios with more significant weighted average maturities.
WALA is computed as WAM inversely: the portfolio’s weighted average market value (WAM) is calculated for each mortgage and loan instrument. The weighted average maturity of the bonds in the portfolio equals the sum of the subtotals times the number of months or years until the bond’s maturity.
Conclusion
- A mortgage-backed securities (MBS) weighted average maturity (WAM) represents the total maturity of the mortgages that comprise the security.
- Compared to MBS with shorter WAMs, those with longer WAMs indicate a somewhat higher interest rate and credit risk.
- Weighted average loan age (WALA), another widely used MBS duration statistic, is the inverse of WAM.
