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Definition: Weighted Average Maturity (WAM)
Weighted Average Maturity (WAM) shows the average time period for maturity of all the maturity based financial instruments such as bonds and treasury bills. It will give maturity time period as per the weightage of each instrument in the group of maturity based instruments owned by an investor in his portfolio.
This method calculates the duration not only on the average value of the total no of years for maturity of the instruments but also on proportional value of instruments. The instruments having maturity includes:
• Government, municipal bonds
• Corporate bonds
• Treasury bills issued by government
• Fixed deposits in banks
So the formula for WAM method is
WAM= (w1/W)*p1+ (w2/W)*p2+……… (wn/W)*p
Where: w1=amount of investment in instrument 1
w2= amount of investment in instrument 2
wn= amount of investment in instrument n
W= total investment in all the instruments
p1= no of years for maturity of instrument 1
p2= no of years for maturity of instrument 2
pn= no of years for maturity of instrument n
Here suppose a person holds 10000 INR in one instrument and it will mature in 5 years and 20000 INR in other and will mature in 3 years, so his total investment in maturity based instruments is 30000 then weighted average maturity period will be (10000/30000)*5+(20000/30000)*3=3.7 years. So this shows that the Weighted Average Maturity of his maturity based investment is 3.7 years.
It gives the maturity period as per weighted average method and not arithmetic average method so it gives more precise results as per the weightage of the instruments.
This helps the investor to get an idea about the maturity time of his investments and help him to decide whether his investment will be for short term or long term. The maturity period will also help to gauge the movement of portfolio with changes in the interest rates.
This can also be used to find the average maturity period for the loans outstanding and get an idea about when its maturity time coming so this can help the borrower plan accordingly for the payments before getting due as well as inform the lender when the loans will be due. This will also help borrower to prioritize the loans as higher loans will have higher weightage.