Weighted Average Maturity (WAM)
What Is Weighted Average Maturity (WAM)?
Weighted average maturity (WAM) is the weighted average amount of time until the maturities on mortgages in a mortgage-backed security (MBS). This term is involved all the more extensively to depict maturities in a portfolio of debt securities, including corporate debt and municipal bonds. The higher the WAM, the longer it takes for the mortgages as a whole or bonds in the portfolio to mature. WAM is utilized to manage debt portfolios and to survey the performance of debt portfolio managers.
WAM is closely connected with weighted average loan age (WALA).
Figuring out 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 duplicated by every percentage, and the sum of the subtotals equals the weighted average maturity of the bonds in the portfolio.
WAM is utilized as a device to manage bond portfolios and to survey the performance of portfolio managers. Mutual funds, for instance, offer bond portfolios with an assortment of WAM rules, and a fund portfolio might have a WAM as short as five years or up to 30 years. The investor can pick a bond fund that matches a specific investing time span. The fund's investment objective incorporates a benchmark, for example, a bond index, and the benchmark portfolio's WAM is accessible for investors and portfolio managers. A portfolio manager's investment performance is passed judgment on in light of the rate of return and the WAM on the fund's bond portfolio.
Bond laddering is an investment strategy that includes purchasing bonds with various maturity dates, and that means that the dollars in the portfolio are returned to the investor at various points over the long haul. A laddering strategy allows the owner to reinvest bond maturity proceeds at current interest rates over the long run, which diminishes the risk of reinvesting the whole portfolio when interest rates are low. Bond laddering helps a pay situated investor keep a reasonable interest rate on a bond portfolio, and these investors use WAM to evaluate the portfolio.
Illustration of How WAM Is Computed
Assume, for instance, that an investor claims a $30,000 portfolio, which incorporates three bond holdings.
- Bond A will be 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 (half) with a maturity of four years.
To register WAM, every one of the percentages is increased continuously until maturity, so the investor can utilize this formula: (16.7% X 10 years) + (33.3% X 6 years) + (half X 4 years) = 5.67 years, or around five years, eight months.
Weighted Average Maturity versus Weighted Average Loan Age
Weighted average maturity (WAM) and weighted average loan age (WALA) are both used to estimate the probability of an investment in a mortgage-backed security being beneficial. Nonetheless, WAM will in general be an all the more comprehensively involved 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 with respect to the dollar amount invested in the portfolio. Portfolios with higher weighted average maturities are more sensitive to interest rate changes.
WALA is really calculated as the inverse of WAM: WAM processes the percentage value of each mortgage or debt instrument in the portfolio. The number of months or years until the bond's maturity is duplicated by every percentage, and the sum of the subtotals equals the weighted average maturity of the bonds in the portfolio.
Features
- A longer WAM infers fairly greater interest rate and credit risk than MBS with shorter WAMs.
- Weighted average maturity (WAM) is a measure of the overall maturity of the mortgages pooled in a mortgage-backed security (MBS).
- WAM is the inverse of another famous MBS duration metric: weighted average loan age (WALA).
