Weighted average life (WAL) is the average length of time that it takes for half of the principal on a securitisation to be repaid. In Australian English, WAL is sometimes referred to as "average life".
WAL is calculated by weighting the time to repayment of each principal payment by the amount of principal that is repaid at that time. For example, if a securitisation has a WAL of 5 years, this means that half of the principal will be repaid in the first 5 years and the other half will be repaid in the next 5 years.
WAL is a useful tool for investors because it can be used to assess the risk of a securitisation. Securitisations with a shorter WAL are less risky than securitisations with a longer WAL, because investors will receive their principal back sooner.
Here are some of the applications of WAL in securitisation:
- To assess the risk of the securitisation: WAL can be used to assess the risk of the securitisation. Securitisations with a shorter WAL are less risky than securitisations with a longer WAL, because investors will receive their principal back sooner.
- To manage the securitisation: WAL can be used to manage the securitisation. For example, if a securitisation has a longer WAL than desired, the issuer may want to consider selling some of the underlying assets to shorten the WAL.
- To track the performance of the securitisation: WAL can be used to track the performance of the securitisation. For example, an investor may want to track the WAL of a securitisation to see if it is increasing or decreasing over time.
WAL is a valuable tool for securitisation. It can be used to assess the risk of the securitisation, manage the securitisation, and track the performance of the securitisation.
WAL is sometimes referred to as "average life".