Weighted Average Maturity - WAM: Definition and Much More from Answers.com

1. Investment Dictionary: Weighted Average Maturity - WAM

The weighted average of the time until all maturities on mortgages in a mortgage-backed security (MBS). The higher the weighted average to maturity, the longer the mortgages in the security have until maturity. Also known as "average effective maturity".

Investopedia Says:

The measure is calculated by totaling each mortgage value represented by the MBS. The weights of each mortgage is found by dividing the value of each into the total of all. To arrive at the WAM number the weight of each security is multiplied by the time until maturity of each mortgage, and then all the values are added together.

For example say an MBS has three mortgages valued at $1,000, $2,000 and $3,000 (a total of $6,000) and mature in one, two and three years respectively. The weights of these are 1/6 (1,000/6,000), 1/3 (2,000/6,000) and 1/2 (3,000/6,000). The WAM is 2 1/3 years (1/6 x 1 year + 1/3 x 2 years + 1/2 x 3 years).

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2. Financial & Investment Dictionary: Weighted Average Maturity

Also called average life or weighted average life and used in mortgage-backed Pass-Through Securities meaning the weighted-average time to the return of a dollar of principal. It is arrived at by multiplying each portion of principal received by the time at which it is received, and then summing and dividing by the total amount of principal.

Fabozzi's Handbook of Fixed Income Securities uses this example:

Consider a simple annual-pay, four-year bond with a face value of $100 and principal payments of $40 the first year, $30 the second year, $20 the third year, and $10 the fourth year. The average life would be calculated as:

Average life = 0.4 x 1 year + 0.3 x 2 years + 0.2 x 3 years + 0.1 x 4 years = 2 years. An alternative measure of investment life is Duration.

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