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