What is the 'Weighted Average Coupon - WAC'
The weighted average coupon (WAC) is the weighted-average gross interest rates of the pool of mortgages that underlie a mortgage-backed security (MBS) at the time the securities were issued. A mortgage-backed security's current WAC can differ from its original WAC as the underlying mortgages pay down at different speeds. In the weighted-average calculation, the principal balance of each underlying mortgage is used as the weighting factor.
BREAKING DOWN 'Weighted Average Coupon - WAC'
For example, suppose a MBS is composed of two different pools of mortgages: $6 million worth of mortgages that yield 7.5% and a pool of $4 million mortgages that yield 5%. The WAC would be 6.5%.
The WAC on a mortgage-backed security is an important piece of information used by analysts to estimate the pre-pay characteristics of that security. It is an important relative value tool in MBS portfolio management and analysis.