Weighted average cost of funds (WACF) is the average cost of funds that a securitisation issuer pays to investors. WACF is calculated by weighting the interest rate of each tranche of the securitisation by the size of the tranche.
For example, if a securitisation has three tranches, with interest rates of 5%, 6%, and 7%, and the sizes of the tranches are 30%, 40%, and 30%, respectively, then the WACF of the securitisation would be 5.6%.
WACF is a valuable tool for securitisation issuers because it allows them to compare the cost of different securitisation structures. It can also be used to determine the amount of fees that the issuer can charge investors.
Here are some of the applications of WACF in securitisation:
- To compare the cost of different securitisation structures: WACF can be used to compare the cost of different securitisation structures. This is important for securitisation issuers because it allows them to choose the structure that will minimize their cost of funds.
- To determine the amount of fees that can be charged to investors: WACF can be used to determine the amount of fees that can be charged to investors. This is important for securitisation issuers because it allows them to generate enough revenue to cover their costs and to make a profit.
- To manage the risk of the securitisation: WACF can be used to manage the risk of the securitisation. For example, if the WACF is too high, then the securitisation may be less attractive to investors. This could lead to lower demand for the securitisation and could increase the risk of default.
WACF is a valuable tool for securitisation issuers. It allows them to compare the cost of different securitisation structures, to determine the amount of fees that can be charged to investors, and to manage the risk of the securitisation.
WACF is sometimes referred to as "average cost of funds".