DEFINITION of 'Weighted Average Rating Factor - WARF'

The weighted average rating factor (WARF) is a measure that is used by credit rating companies to indicate the credit quality of a portfolio. This measure aggregates the credit ratings of the portfolio's holdings into a single rating. WARFs are most often calculated for collateralized debt obligations (CDOs).

BREAKING DOWN 'Weighted Average Rating Factor - WARF'

To calculate the weighted average rating factor on a CDO, the rating agencies must first determine a credit rating for each instrument underlying the CDO. In the Fitch Ratings taxonomy, for example, this rating can range from extremely high credit quality (AAA) to low quality (CCC) to default (D). This letter rating corresponds to a numerical rating factor, which in turn correspond to the 10-year probability of default. The WARF is determined by calculating the weighted average of these numerical factors. To calculate the weighted average, the notional balance of the asset is multiplied by the rating factor and then these values are summed. This sum is then divided by the total notional balance of the portfolio.

 

RELATED TERMS
  1. Weighted Average Credit Rating

    The weighted average credit rating is the weighted average rating ...
  2. Portfolio Weight

    Portfolio weight is the percentage composition of a particular ...
  3. Credit Quality

    Credit quality is one of the principal criteria for judging the ...
  4. Corporate Credit Rating

    A corporate credit rating is an opinion of an independent agency ...
  5. Weighted

    Weighted is a description of adjustments to a figure to account ...
  6. Fitch Ratings

    An international credit rating agency based out of New York City ...
Related Articles
  1. Investing

    What Is A Corporate Credit Rating?

    Is the bond you're buying investment grade, or just junk? Find out how to check the score.
  2. Investing

    Down The Rabbit Hole: Deciphering CDOs

    Warren Buffett claims that understanding these instruments would mean reading 750,000 pages of text. Read on to learn the basics.
  3. Personal Finance

    The Importance Of Your Credit Rating

    A great starting point for learning what a credit score is, how it is calculated and why it is so important.
  4. Investing

    S&P 500 ETFs: Market Weight Vs. Equal Weight (RSP, SPY)

    Both S&P 500 and S&P 500 EWI indexes include the same set of stocks, but different weighting strategies give them separate individual properties.
  5. Personal Finance

    The Power of Major Credit Rating Agencies

    The performance of major independent credit rating agencies is a controversial topic, particularly due to the strength of their influence.
  6. Investing

    When To Trust Bond Rating Agencies

    Despite investor distrust, rating agencies can be helpful. Just be sure you use these ratings as a starting point.
  7. Personal Finance

    A Brief History Of Credit Rating Agencies

    Credit rating agencies have a long history in the U.S. Learn about what they do and how were they developed.
  8. Personal Finance

    Take the Right Steps to Build Excellent Credit

    There are several things you can do to protect and improve your credit score.
  9. Personal Finance

    How to Read Your Consumer Credit Report

    Learning how to read your consumer credit report is vital, as it includes important information about your credit history.
  10. Personal Finance

    What Increasing Consumer Debt and Rising Interest Rates Mean for You

    Don't be confused by the latest economic news. Learn how increasing consumer debt and rising interest rates might affect you.
RELATED FAQS
  1. What are the Benefits of Credit Ratings?

    Learn how credit ratings are an important tool for borrowers. Typically, the better your credit rating, the better the loan ... Read Answer >>
  2. determine the proper weights of costs of capital?

    Learn how to calculate the weights of the different costs of capital, as well as how this is used to determine the weighted ... Read Answer >>
  3. The Differences Between a Collateralized Debt Obligation (CDO) and an Asset Backed ...

    Learn about the differences in relationships between asset-backed securities (ABS) and collateralized debt obligations (CDOs) Read Answer >>
  4. How can I calculate the expected return of my portfolio?

    Understand the components of the equation used to calculate the expected return of an investor's portfolio. Learn why the ... Read Answer >>
Hot Definitions
  1. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  2. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  3. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  4. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  5. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  6. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
Trading Center