Weighted Average Remaining Term

Posted in Finance, Accounting and Economics Terms, Total Reads: 148
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Definition: Weighted Average Remaining Term

Weighted Average Remaining Term (WART) is defined as the remaining time period of an asset backed or mortgaged security. An asset backed security or a mortgage backed security is a loan that is secured by one or more than mortgages. The government or an investment back may combine all these mortgages into one financial security and sell it to investors.


The instrument is measured in months and it depends on how quickly mortgages are paid back. If the mortgages are paid back then the weighted average remaining term will be less. WART depends on Weighted Average Maturity that is defined as the weighted average time of all the maturities in a maturity backed security or asset backed security.


For example there are 5 mortgages to be paid back of Rs.10000, 20000, 30000, 40000 and 50000 in 1,2,3,4 and 5 years respectively. The total amount is 150000, the weights of these individual mortgages is 1/15, 2/15, 3/15, 4/15 and 5/15 and

WAM = (1/15 * 1 + 2/15 * 2 + 3/15 * 3 + 4/15 * 4 + 5/15 * 5)

WAM = 11/3 years.


These instruments are made by big investment banks like JP Morgan Chase, Goldmann Sachs, and Morgan Stanley etc. Collateralized Debt Obligations an instrument made out asset backed security almost crashed the Global Financial System in 2008.

 

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