Weighted Average Maturity (WAM)

Weighted average maturity (WAM) measures the average remaining time until the securities in a debt portfolio mature, weighted by the dollar amount invested in each security. It’s commonly used for mortgage-backed securities (MBS), corporate bonds, municipal bonds, and bond funds to evaluate time horizon, interest-rate sensitivity, and portfolio risk.

Key takeaways

• WAM shows the portfolio’s average time to maturity, expressed in years or months, weighted by principal.
• Longer WAMs generally mean greater exposure to interest-rate and credit risk.
• WAM helps investors match bond holdings or funds to desired investment horizons and risk tolerances.
• WAM and weighted average loan age (WALA) are complementary: WAM measures remaining life, while WALA measures how long loans have been outstanding.

How WAM is calculated

1. Determine each security’s weight: the security’s principal divided by total portfolio principal (w_i).
2. Determine each security’s time to maturity (t_i), in years or months.
3. Multiply each weight by its time to maturity: w_i × t_i.
4. Sum the results: WAM = Σ (w_i × t_i).

Formula: WAM = Σ (principal_i / total_principal) × time_to_maturity_i

WAM can be reported in years or months depending on the investor’s needs.

Example

Portfolio total: $30,000
* Bond A: $5,000 (16.67%) — 10 years → 0.1667 × 10 = 1.667
* Bond B: $10,000 (33.33%) — 6 years → 0.3333 × 6 = 2.000
* Bond C: $15,000 (50.00%) — 4 years → 0.50 × 4 = 2.000

WAM = 1.667 + 2.000 + 2.000 = 5.667 years (about 5 years, 8 months)

WAM vs. WALA

• WAM (Weighted Average Maturity) — average remaining time to maturity of the pool.
• WALA (Weighted Average Loan Age) — average time since each loan’s origination.
  They are not mathematical inverses; instead they are complementary measures. For similar-loan pools, WAM + WALA can approximate the original average loan term, which helps assess prepayment risk and expected cash flows in MBS analysis.

Uses and implications

• Portfolio construction: Choose funds or bonds with WAMs that align with your target horizon and liquidity needs.
• Risk assessment: Longer WAMs increase sensitivity to interest-rate movements and often to credit events.
• Performance evaluation: Fund managers are often evaluated on returns relative to benchmarks that include WAM characteristics.
• MBS analysis: WAM helps estimate expected cash-flow timing and profitability, particularly when combined with prepayment and loan-age metrics.

Practical tip — Bond laddering

Bond laddering staggers maturities across a range of dates (short to long). This strategy returns principal to the investor at multiple points, allowing reinvestment at prevailing rates and reducing the risk of reinvesting a large amount at an unfavorable rate. Investors can use WAM to measure and compare laddered strategies or ladder-based funds.

Conclusion

WAM is a simple but powerful metric for understanding the time profile of a debt portfolio. It aids in matching investments to time horizons, assessing interest-rate exposure, and comparing portfolios or funds. Use WAM alongside other metrics (duration, credit quality, WALA, and prepayment assumptions for MBS) to make well-rounded fixed-income decisions.