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.