To calculate the average life, multiply the date of each payment (expressed as a fraction of years or months) by the percentage of total principal that has been paid by that date, add the results, and divide by the total issue size. Then divide the weighted total by the bond face value to get the average life.

How is Wala calculated?

WALA is arrived at by multiplying the initial nominal value of each individual mortgage in the MBS pool by the number of months since the mortgage loan was originated. WALA and other measures of MBS maturity are used to estimate both profit potential and prepayment risk.

What is the difference between WAM and WAL?

Weighted Average Life (WAL): WAL, as it applies to money market funds, is calculated in the same manner as the Weighted Average Maturity (WAM), but is based solely on the periods of time remaining until the securities held in the fund’s portfolio (a) are scheduled to be repaid or (b) would be repaid upon a demand by …

How do you evaluate MBS?

A statistic that is commonly used as a measure of the effective maturity of a MBS is the WAL, sometimes called just “average life.” To calculate the WAL, multiply the date (expressed as a fraction of years or months) of each payment by the percentage of total principal that is paid off at that date, then add up these …

What is weighted average life used for?

Weighted average life is used to determine the dollar amount that remains outstanding on a mortgage or loan balance.

Is weighted average life the same as duration?

Bond duration. Bond duration is the weighted-average time to receive the discounted present values of all the cash flows (including both principal and interest), while WAL is the weighted-average time to receive simply the principal payments (not including interest, and not discounting).

What is weighted average coupon?

The weighted average coupon (WAC) is a measurement of the rate of return on a pool of mortgages that is sold to investors as a mortgage-backed security (MBS). The underlying mortgages are repaid at different lengths of time, so the WAC represents its return at the time it was issued and may differ from its WAC later.

What is CPR in MBS?

A conditional prepayment rate (CPR) estimates the likely prepayment rate for a pool of loans, such as a mortgage backed security. The higher the CPR, the more prepayments are expected and the less interest the investor is likely to receive in total. This is called prepayment risk.

Is duration the same as weighted average life?

Bond duration is the weighted-average time to receive the discounted present values of all the cash flows (including both principal and interest), while WAL is the weighted-average time to receive simply the principal payments (not including interest, and not discounting).

How do investors make money off MBS?

When an investor buys a mortgage-backed security, he is essentially lending money to home buyers. In return, the investor gets the rights to the value of the mortgage, including interest and principal payments made by the borrower. The bank acts as the middleman between MBS investors and home buyers.

What is weighted average life (WAL)?

In finance, the weighted-average life (WAL) of an amortizing loan or amortizing bond, also called average life, is the weighted average of the times of the principal repayments: it’s the average time until a dollar of principal is repaid. In a formula, where:

What is the formula for weighted average life?

In finance, the weighted-average life (WAL) of an amortizing loan or amortizing bond, also called average life, is the weighted average of the times of the principal repayments: it’s the average time until a dollar of principal is repaid. In a formula, WAL = ∑ i = 1 n P i P t i , {displaystyle {text {WAL}}=sum _ {i=1}^ {n} {frac {P_ {i}}

What is the difference between duration and weighted average life?

Weighted-average life. Bond duration is the weighted-average time to receive the discounted present values of all the cash flows (including both principal and interest), while WAL is the weighted-average time to receive simply the principal payments (not including interest, and not discounting).

What is weighted average life on a mortgage?

Weighted average life is used to determine the dollar amount that remains outstanding on a mortgage or loan balance. The calculation is “weighted” because it considers when the payments to the principal are made—if, for example, nearly all of the principal payments are made in five years, WAL will be close to five years.