Table of Contents
- What Is the Weighted Average Remaining Term (WART)?
- Key Takeaways on WART
- How the Weighted Average Remaining Term (WART) Works
- Example of WART
- WART and Interest Rate Risk
- WART vs. WALA
- What Is Prepayment Risk?
- What Is the Purpose of a Mortgage-Backed Security (MBS)?
- What Is the Difference Between Weighted Average Maturity (WAM) and Weighted Average Life (WAL)?
What Is the Weighted Average Remaining Term (WART)?
Let me explain what Weighted Average Remaining Term (WART) really is—it's a metric that shows you the average time left until maturity for a portfolio of asset-backed securities (ABS). If the WART is longer, that means the assets in your portfolio will take more time to mature on average.
You might also hear it called weighted average maturity (WAM), and it's frequently used with mortgage-backed securities (MBS), but it applies to any fixed-income securities portfolio. Remember, WART is basically the flip side of weighted average loan age (WALA).
Key Takeaways on WART
Here's what you need to know: WART measures the average maturity time of a fixed-income portfolio. It's the same as WAM and is key for MBS and ABS, though it works for any fixed-income setup. If you're an investor who cares about specific maturity profiles, WART lets you compare options directly. Most importantly, it helps you gauge interest rate and prepayment risks in your portfolio.
How the Weighted Average Remaining Term (WART) Works
WART gives you a clear picture of whether your portfolio's assets mature soon or far out. For example, an MBS with mortgages close to payoff has a low WART, while one with new loans has a high one. Depending on your risk tolerance and funding, you might prefer certain maturities.
To calculate it, start by totaling the outstanding balances of the assets and figuring each one's share of that total. Then, weight each asset's remaining maturity by its share, and sum those up for the portfolio's WART.
You'll see WART in disclosures for MBS from places like Freddie Mac, where it shows how things like prepayments affect the security. Use it to compare investments or build a portfolio with varied WARTs.
Example of WART
Take an MBS with four loans: Loan 1 has $150,000 left due in 5 years, Loan 2 $200,000 in 7 years, Loan 3 $50,000 in 10 years, and Loan 4 $100,000 in 20 years. Total remaining is $500,000.
Figure each loan's share: Loan 1 is 30%, Loan 2 40%, Loan 3 10%, Loan 4 20%. Multiply maturities by shares: 5 x 0.3 = 1.5, 7 x 0.4 = 2.8, 10 x 0.1 = 1, 20 x 0.2 = 4. Add them up, and you get a WART of 9.3 years.
WART and Interest Rate Risk
Securities with longer maturities are more sensitive to interest rate shifts—that's duration in action. So, MBS or ABS with high WARTs carry more interest rate risk than those with low ones.
One strategy to handle this is bond laddering, where you buy bonds maturing at different times. This spreads out your reinvestments, reducing the risk of dumping everything back in when rates are low. If you're focused on income, use WART to keep your portfolio's interest rates steady.
WART vs. WALA
Both WART and Weighted Average Loan Age (WALA) help estimate credit risk, interest rate sensitivity, and profitability in fixed-income portfolios. WART (or WAM) measures time to maturity for MBS pools, weighted by investment amounts—higher WART means more rate sensitivity.
WALA is just the inverse: it multiplies months or years to maturity by percentages and sums them for the average maturity.
What Is Prepayment Risk?
Prepayment risk hits MBS and ABS when debtors pay early or refinance, shortening the portfolio's WART and altering its risk. This is big in falling rate environments, as refinanced mortgages cut off cash flows from the original loans.
What Is the Purpose of a Mortgage-Backed Security (MBS)?
MBS bundle many mortgages into one security to spread risk—any single default gets diluted across the pool.
What Is the Difference Between Weighted Average Maturity (WAM) and Weighted Average Life (WAL)?
WAM and WAL are used for money market funds. WAM considers interest rate resets, but WAL doesn't. The SEC caps WAL at 120 days for these funds.
Other articles for you
A free market is an economic system driven by supply and demand with minimal government control, emphasizing voluntary exchanges.
Listing requirements are the criteria companies must meet to trade shares on stock exchanges like NYSE or Nasdaq.
The equity market, or stock market, is where companies issue and trade shares to raise capital and allow investors to own business stakes.
Income funds are investment vehicles focused on generating regular income through bonds, stocks, and other securities rather than capital growth.
Management fees are charges by investment managers for handling funds, varying by fund type and often impacting investor returns.
The dependency ratio measures the proportion of non-working age dependents to the working-age population, highlighting economic and taxation burdens.
Health insurance is a contract that covers medical costs in exchange for premiums, with various types and federal options in the US.
A transfer tax is a government-imposed charge on transferring property ownership, including real estate and inheritances, with specific exemptions and variations by jurisdiction.
The Vasicek Interest Rate Model is a mathematical tool for predicting the evolution of interest rates using a single-factor stochastic approach.
Yearly Renewable Term (YRT) is a one-year life insurance policy that renews annually with increasing premiums based on age.