Weighted Average Life (WAL) Calculator
Calculate the average time until the principal of a debt instrument is repaid.
Calculation Results
What is Weighted Average Life (WAL)?
Weighted Average Life (WAL) is a critical financial metric used primarily in fixed-income analysis, particularly for bonds and loans that repay principal over time rather than in a single lump sum. Unlike the "maturity date" which only tells you when the final payment is due, WAL indicates the average time it takes for every dollar of the principal to be returned to the investor or lender.
The Importance of WAL in Finance
In structured finance and debt markets, WAL helps investors understand their exposure to interest rate risks and prepayment risks. A shorter WAL means the principal is returned faster, reducing the duration and the impact of market volatility. It is commonly used when analyzing Mortgage-Backed Securities (MBS) and amortizing commercial loans.
The WAL Calculation Formula
The standard formula for calculating Weighted Average Life is:
WAL = Σ (Time to Repayment × Principal Repaid) / Total Principal
Where:
- Time to Repayment: The time (usually in years) from the start date to each specific principal payment.
- Principal Repaid: The amount of principal returned at that specific time.
Example Calculation
Imagine a loan of 100,000 units with equal principal repayments of 25,000 made annually over 4 years:
- Year 1: 25,000 repaid (1 × 25,000 = 25,000)
- Year 2: 25,000 repaid (2 × 25,000 = 50,000)
- Year 3: 25,000 repaid (3 × 25,000 = 75,000)
- Year 4: 25,000 repaid (4 × 25,000 = 100,000)
Total Weight: 250,000. Total Principal: 100,000.
WAL = 250,000 / 100,000 = 2.5 Years.