# What Is a Weighted Average Coupon (WAC)?

A weighted average coupon (WAC) is the weighted average of the coupons of all the bonds in a portfolio. The weighting is based on the market value of each bond.

The weighted average coupon is used to give a more accurate picture of the portfolio's average interest rate. This is because bonds with higher coupons will have a greater impact on the weighted average than bonds with lower coupons.

For example, if a portfolio contains two bonds with coupons of 5% and 8%, and the market value of the first bond is \$100,000 and the market value of the second bond is \$50,000, the weighted average coupon would be calculated as follows:

5% x \$100,000 = \$5,000
8% x \$50,000 = \$4,000

\$5,000 + \$4,000 = \$9,000

\$9,000 ÷ (\$100,000 + \$50,000) = 6.67%

This weighted average coupon of 6.67% is higher than the simple average coupon of (5% + 8%) ÷ 2 = 6.5%. This is because the bond with the higher coupon (8%) has a greater weight in the portfolio than the bond with the lower coupon (5%).

The weighted average coupon can be used to compare different portfolios of bonds. For example, a portfolio with a higher weighted average coupon will have a higher average interest rate than a portfolio with a lower weighted average coupon.

The weighted average coupon can also be used to compare a portfolio of bonds to a benchmark index. For example, if the weighted average coupon of a portfolio is higher than the weighted average coupon of a benchmark index, it means that the portfolio has a higher average interest rate than the benchmark.

#### How do you calculate weighted average maturity?

The weighted average maturity (WAM) is a measure of the average length of time to maturity of the bonds in a portfolio.

To calculate the WAM, you first need to calculate the maturity of each bond in the portfolio. The maturity of a bond is the number of years until the bond's maturity date.

Next, you need to calculate the weight of each bond. The weight of a bond is equal to the bond's market value divided by the total market value of all the bonds in the portfolio.

Finally, you need to calculate the weighted average maturity. To do this, you simply multiply the weight of each bond by its maturity and then add all of these numbers together.

For example, let's say you have a portfolio of three bonds with the following market values and maturities:

Bond 1: \$1,000 (maturity: 5 years)
Bond 2: \$2,000 (maturity: 10 years)
Bond 3: \$3,000 (maturity: 15 years)

The total market value of the portfolio is \$6,000.

The weight of bond 1 is \$1,000/\$6,000 = 1/6.
The weight of bond 2 is \$2,000/\$6,000 = 1/3.
The weight of bond 3 is \$3,000/\$6,000 = 1/2.

The weighted average maturity of the portfolio is:

(1/6) * 5 + (1/3) * 10 + (1/2) * 15 = 10 years

##### Why do investors buy mortgage-backed securities?

Mortgage-backed securities (MBS) are a type of asset-backed security that is secured by a mortgage or pool of mortgages. The mortgages are sold to a group of individuals (a government agency or investment bank) that securitizes, or packages, the loans together into a security that can be sold to investors. The cash flow from the underlying pool of mortgages is used to pay the investor periodic interest payments and repay the principal balance of the security over time.

MBS are attractive to investors for a number of reasons. First, MBS offer a higher yield than other types of fixed-income securities, such as government bonds. This is because MBS are considered to be higher-risk investments than government bonds. Second, MBS are relatively easy to trade and can be bought and sold on the secondary market. This liquidity can be attractive to investors who need to raise cash quickly or who want to take advantage of market fluctuations.

Lastly, MBS are a relatively safe investment compared to other types of securities, such as stocks. This is because MBS are backed by physical assets (the underlying mortgages) and are not subject to the same level of price volatility as stocks.

MBS are not without risk, however. The most significant risk is interest rate risk, which is the risk that interest rates will rise and the value of the MBS will fall. This risk can be mitigated by investing in MBS with shorter terms to maturity.

### How is weighted average life of a mortgage calculated?

The weighted average life (WAL) of a mortgage is the average amount of time that each dollar of principal owed on the mortgage is expected to be outstanding.

To calculate WAL, you first need to determine the mortgage's principal payment schedule. This can be done by creating a amortization schedule. Once you have the principal payment schedule, you need to weight each payment by its proportion of the remaining principal balance. Finally, you take the sum of these weighted payments and divide by the original mortgage amount to get the WAL.

For example, let's say you have a \$100,000 mortgage with a 30-year term and a 4% interest rate. The monthly payment would be \$477.42, and the amortization schedule would look like this:

| Year | Balance |
|------|---------|
| 1 | \$96,280 |
| 2 | \$92,474 |
| 3 | \$88,642 |
| 4 | \$84,786 |
| ... | ... |
| 30 | \$0 |

To calculate the WAL, we need to weight each payment by the proportion of the remaining balance that it represents. For example, the payment in year 1 is \$477.42, and the remaining balance is \$96,280, so the weighted payment would be \$477.42 * (1 / \$100,000) = 0.0048. The table below shows the weighted payments for each year of the mortgage:

| Year | Weighted Payment |
|------|------------------|
| 1 | \$0.0048 |
| 2 | \$0.0094 |
| 3 | \$0.0137 |
| 4 | \$0.0177 |
| ... | ... |
| 30 | \$0.

What is the difference between WAC and AWP? The two terms are often used interchangeably, but there are some subtle differences between them.

WAC, or Weighted Average Cost of Capital, is a metric that is used to determine the cost of funds for a company or project. It takes into account the different types of capital that are used (equity, debt, etc.) and weights them according to their importance.

AWP, or Average Whole-Property Cost, is a metric that is used to determine the cost of a property. It takes into account the purchase price, the costs of repairs and renovations, and the costs of running the property (utilities, insurance, etc.).