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. 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 six years. The investor also owns bond C, a $15,000 bond (50%) with a maturity of four 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 about five years, eight months.

Examples of WAM in Use

WAM is 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 or 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.

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 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.

RELATED TERMS
  1. Bond Ladder

    A bond ladder is a portfolio of fixed-income securities in which ...
  2. Current Maturity

    The current maturity is the interval between the present date ...
  3. Term To Maturity

    In bonds, term to maturity is the time between when a bond is ...
  4. Maturity Date

    The maturity date is the date when the principal amount of a ...
  5. Balloon Interest

    Balloon interest is an increased coupon rate on long-term maturity ...
  6. Bond Fund

    A bond fund is a fund invested primarily in bonds and other debt ...
Related Articles
  1. 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.
  2. 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.
  3. Investing

    How Bonds Are Vital to a Successful Portfolio

    While bonds are a vital part of an investment portfolio, they are often ignored.
  4. Investing

    Why Bond Prices Fall When Interest Rates Rise

    Never invest in something you don’t understand. Bonds are no exception.
  5. Investing

    Five Key Bond Moves to Profit from Rising Yields

    Here are five key moves to consider for structuring portfolios to profit from rising yields.
  6. Investing

    6 Ways That Investors Use Bonds

    Learn how the stodgy stereotype of bonds can overshadow the basic and advanced uses of what these investments can do for your portfolio.
  7. Investing

    Corporate Bond Basics: Learn to Invest

    Understand the basics of corporate bonds to increase your chances of positive returns.
  8. Investing

    The Best Bet for Retirement Income: Bonds or Bond Funds?

    Retirees seeking income from their investments typically look into bonds. Here's a look at the types of bonds, bond funds and their pros and cons.
  9. Investing

    How Rising Interest Rates Impact Bond Portfolios

    A look at the impact that changing interest rates - rising or falling - have on bonds and what investors need to consider.
Trading Center