What is Weighted Average Maturity (WAM)?
WAM, or weighted average maturity, is the weighted average time until the securities in a portfolio mature.
The weighted average maturity (WAM) of a mortgage-backed security is the weighted average amount of time until the maturities of the mortgages in the security (MBS). This term refers to the maturities of debt securities in a portfolio, including corporate debt and municipal bonds. The higher the WAM, the longer it takes for the portfolio’s mortgages or bonds to mature. WAM is used to manage debt portfolios and evaluate debt portfolio managers’ performance.
WAM is highly correlated with weighted average loan age (WALA).
The percentage value of each mortgage or debt instrument in the portfolio is used to calculate WAM. The number of months or years until the bond’s maturity is multiplied by each percentage, and the sum of the subtotals equals the portfolio’s weighted average maturity.
Difference between the weighted average maturity (WAM) and weighted average loan age (WALA)
Both weighted average maturity (WAM) and weighted average loan age (WALA) are used to estimate the likelihood of a profitable investment in a mortgage-backed security. WAM, on the other hand, is a more widely used measure for the maturity of pools of mortgage-backed securities. It calculates the average time it takes for securities in a debt portfolio to mature, weighted by the amount invested in the portfolio. Portfolios with longer weighted average maturities are more sensitive to changes in interest rates.
WALA is the inverse of WAM, which computes the percentage value of each mortgage or debt instrument in the portfolio. The number of months or years until the bond matures is multiplied by each percentage, and the sum of the results is calculated.