What Is the Weighted Average Re෴maining Term (WART)?

Weighted Average Remaining Term (WART) is a metric that captures the average time to maturity of a portfolio of asset-backed securities (ABS). The longer the WART, the longer t𒆙he portfolio's assets will take to mature, on average.

Also known as the 澳洲幸运5开奖号码历史查询:weighted average maturity (WAM), WART is often used in relation to 澳洲幸运5开奖号码历史查询:mortgage-backed securities (MBS) but can also be ♔ap🐭plied to any portfolio of fixed-income securities.

WART is closely related to 澳洲幸运5开奖号码历史查询:weighted average loan age (WALA), which is its inverse.

How ඣthe Weighted Average Remaining Term (WART) Works

The WART of a portfolio is a helpful metric because it helps investors understand whether the 澳洲幸运5开奖号码历史查询:time to maturity of the assets within the portfolio is relatively short or long. For instance, a MBS whose underlying mortgages are all very near to the end of their terms would have a low overall WART, while one with mortgages that have only recently been initiated would have a higher WART. Depending on their risk tolerances and sources of funding, some investors may prefer being exposed to investments with a particular time to mat🗹urity.

To calculate the WART of a portfolio, the investor first adds together the outstanding balance of the 澳洲幸运5开奖号码历史查询:underlying assets and calculates the size of each asset in relation to that total. Then, the investor would weigh the remaining time to maturity of each asset by using each asset’s relative size. As a final step, they would then add up the weighted times to maturity of each asset to arrive at a WART for the entire portfolio.🎉

WART is commonly used in the disclosure materials associated with MBS, such as those offered by 澳洲幸运5开奖号码历史查询:Freddie Mac. In this context, WART serves not to compare two securities but to demonstrate the effects of external forces such as 澳洲幸运5开奖号码历史查询:prepayment on thꦆe WART of the security.  An investor considering a Freddie Mac security would consider these WART calculations when comparing it to an alternative investment or when seeking to construct a portfolio containing different WARTs.

Example of WART

To illustrate, consider an MBS consisting of four mortgage loans, in which loan 1 has $150,000 of remaining principal due in five years, loan 2 has $200,000 due🍃 in seven years, loan 3 has $50,000 due in 10 years, and loan 4 has $100,000 due in 20 years. The total remainin🌺g value of the loans is therefore $500,000.

To calculate the WART, our next step would be to 🔴calculate each mortgage’s share of the total remaining value. By dividing each mortgage’s remaining principal by the $500,000 total, we would find that loan 1 represents 30% of the total, loan 2 represents 40%, loan 3 ওrepresents 10%, and loan 4 represents 20%.

We can then calculate the weighted remaining term of each🅷 mortgage by multiplying its time to maturity꧃ by its share of the $500,000 total. In doing so, we find the following weighted remaining terms:

• Loan 1: 5 years x 30% = 1.5 weighted years
• Loan 2: 7 years x 40% = 2.8 weighted years
• Loan 3: 10 years x 10% = 1 weighted years
• Loan 4: 20 years x 20% = 4 weighted years

Our final step is to simply add these weighted years together, to arrive at a WART for the entire portfolio. In this case, our WART is: 1.5 + 2.8 + 1 + 4 = 9.3 years.

WART and Interest Rate Risk

In general, bonds and other fixed-income securities with longer maturities have greater price sensitivity to interest rate changes than shorter maturity securities (known as the security's duration). MBS and ABS with larger WARTs, therefore, hold bonds that, on average, will have more 澳洲幸运5开奖号码历史查询:interest rate risk than those with smaller WARTs.

One way to reduce this type of risk is through laddering. 澳洲幸运5开奖号码历史查询:Bond laddering is an investment strategy that involves purchasing bonds with different maturity dates, which means that the dollars in the portfolio are returned to the investor at different points over time. A laddering strategy allows the owner to reinvest bond maturity proceeds at current inඣterest rates over time, which reduces the risk of reinvesting the entire portfolio when interest rates are low.

Bond ladd𝐆ering helps an income-oriented inves🎐tor maintain a reasonable interest rate on a bond portfolio, and these investors use WART to assess the portfolio.

WART vs. WALA

Weighted average remaining term (WART) and weighted average loan age (WALA) are both used to estimate the credit risk, interest rate sensitivity, and potential profitability of fixed-income portfolios. WAM tends to be used as a measure for the maturity of pools of mortgage-backed securities (MBS). ꦫIt measures the amount o𝕴f time for the securities in a fixed-income portfolio to mature, weighted in proportion to the dollar amount invested. Portfolios with higher WARTs are more sensitive to interest rate changes.

WALA is essentially the inverse of WART: The number of months or years until the bond’s maturity is multiplied by each percentage, and the sum of the subtotals equals the weighted average maturity of the bonds in the portfolio.