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Updated July 31, 2024 Reviewed by Reviewed by Somer AndersonSomer G. Anderson is CPA, doctor of accounting, and an accounting and finance professor who has been working in the accounting and finance industries for more than 20 years. Her expertise covers a wide range of accounting, corporate finance, taxes, lending, and personal finance areas.
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 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 portfolios and to assess the performance of portfolio managers. Mutual funds, 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.
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.
Assume, for example, that an investor owns a $30,000 portfolio, which includes three bond holdings.
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 (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’s maturity is multiplied by each percentage, and the sum of the subtotals equals the weighted average maturity of the bonds in the portfolio.
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.
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.
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.
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.