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 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, and WAM is used to manage debt portfolios and to assess the performance of debt portfolio managers.

BREAKING DOWN 'Weighted Average Maturity - WAM'

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.

How WAM Is Computed

Assume, for example, that an investor owns a $30,000 portfolio, which includes three bond holdings. Bond A is a $5,000 bond (16.7% of the total portfolio) and matures in 10 years, and bond B is a $10,000 investment (33.3%) that matures in 6 years. The investor also owns bond C, a $15,000 bond (50%) with a maturity of 4 years. 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 slightly more than 5 years, 8 months.

Examples of Bond Laddering

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 several 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.

Factoring in Portfolio Management

WAM is also 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 of 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.

RELATED TERMS
  1. Average Effective Maturity

    For a single bond, it is a measure of maturity that takes into ...
  2. Bond Ladder

    A portfolio of fixed-income securities in which each security ...
  3. Current Maturity

    The interval between the present date and the maturity date of ...
  4. Term To Maturity

    The remaining life of a financial instrument. In bonds, it is ...
  5. Bond Laddering

    A portfolio management strategy and model for investing in fixed ...
  6. Maturity Date

    The date on which the principal amount of a note, draft, acceptance ...
Related Articles
  1. Investing

    Evaluating Bond Funds: Keeping It Simple

    Discover some of the key factors for determining a fund's risk-return profile.
  2. Investing

    How To Evaluate Bond Performance

    Learn about how investors should evaluate bond performance. See how the maturity of a bond can impact its exposure to interest rate risk.
  3. Financial Advisor

    The Effect of Fed Fund Rate Hikes on Your Bond Portfolio

    Learn how an increase in the federal funds rate may impact a bond portfolio. Read about how investors can use the duration of their portfolio to reduce risk.
  4. Investing

    The Top 5 Bond Mutual Funds for 2016

    Learn about bond mutual funds that investors may want to consider for 2016. Understand why the risk of rising interest rates is a concern heading into 2016.
  5. Investing

    How Do I Calculate Yield To Maturity Of A Zero Coupon Bond?

    Yield to maturity is a basic investing concept used by investors to compare bonds of different coupons and times until maturity.
  6. Investing

    Lowering Portfolio Volatility With Certain Bond ETFs (AGG, BND)

    Learn about how overall portfolio risk can be reduced by adding a variety of different types of bond ETFs to a primarily stock portfolio.
  7. Investing

    Key Strategies To Avoid Negative Bond Returns

    It is difficult to make money in bonds in a rising rate environment, but there are ways to avoid losses.
  8. Investing

    CPFXX: Top Money Market Mutual Funds From American Century

    Learn about the profiles of three money market funds in the American Century Investments family of funds and why these funds are solid investment ideas.
  9. Retirement

    Bond Ladders: A Bad Idea for Retirees?

    Using a ladder approach may sound smart, but purchasing individual bonds usually means higher costs and less flexibility than buying bond funds.
  10. Investing

    Top 6 Uses For Bonds

    We break down the stodgy stereotype to see what these investments can do for you.
RELATED FAQS
  1. What is the difference between yield to maturity and the yield to call?

    Determining various the various yields that callable bonds can provide investors is an important factor in the bond purchasing ... Read Answer >>
  2. What happens to the price of a premium bond as it approaches maturity?

    Learn how bonds trade in regard to premiums and discounts, and how bond prices shift closer to par value as bonds approach ... Read Answer >>
  3. Why is my bond worth less than face value?

    Find out how bonds can be issued or traded for less than their listed face values, and learn what causes bond prices to fluctuate ... Read Answer >>
  4. What are the maturity terms for Treasury bonds?

    Learn how treasury bonds pay interest, when they reach maturity and the differences between terms for treasury bonds and ... Read Answer >>
Hot Definitions
  1. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  2. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  3. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  4. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  5. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  6. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
Trading Center