What Is Weighted Average Maturity?
The higher the WAM, the longer it takes for all of the holdings in the portfolio to mature. WAM is used to manage debt portfolios and to evaluate the profitability of the portfolio managers.
How Does Weighted Average Maturity Work?
Weighted Average Maturity Calculation with Example
The WAM can be calculated by determining the weight of each maturity in the average, multiplying that weight by the security’s maturity, and summing the weighted maturities. The weight is the proportion of total portfolio value that each security represents.
For example, assume you want to find the WAM of three loans, Loan X is for $2,000 that matures in 10 years, Loan Y is for $5,000 and matures in 8 years, and Loan Z is for $10,000 and matures in 1 year:
- Determine the weight of each loan by finding its percentage of the total amount, in this case, $17,000.
- Now, multiply the weight of each loan by the number of years left until the loan’s maturity.
- Add these weighted maturities to determine the WAM.
The portfolio of loans will mature in 4.11 years, according to its weighted average.