What is the difference between WAM and WAL?
Weighted Average Life (WAL): WAL, as it applies to money market funds, is calculated in the same manner as the Weighted Average Maturity (WAM), but is based solely on the periods of time remaining until the securities held in the fund’s portfolio (a) are scheduled to be repaid or (b) would be repaid upon a demand by …
What is the difference between average life and duration?
The total term of a loan is the number of years from the loan draw down date to the last debt service. The average life of a loan is the number of years that pass from the loan draw down until half the time- weighted principal is repaid.
Is effective duration the same as duration?
While Effective Duration is a more complete measure of a bond’s sensitivity to interest rate movements versus the Macauley or Modified Duration measures, it still falls short because it is a linear approximation for small changes in yield; that is, it assumes that duration stays the same along the yield curve.
What is effective duration?
Effective duration is a duration calculation for bonds that have embedded options. This measure of duration takes into account the fact that expected cash flows will fluctuate as interest rates change and is, therefore, a measure of risk.
How do you calculate weighted average life?
Weighted average life refers to how long it would take for roughly half of the outstanding principal amount on a loan to be repaid. To calculate weighted average life, divide the loan’s outstanding weighted total payments by the unweighted total payments.
How do you calculate weighted average duration?
To compute WAM, each of the percentages is multiplied by the years until maturity, so the investor can use this formula: (16.7% X 10 years) + (33.3% X 6 years) + (50% X 4 years) = 5.67 years, or about five years, eight months.
Is weighted average maturity the same as duration?
Effective duration and average maturity apply if you have a portfolio consisting of several bonds. While maturity refers to when a bond expires, or matures, duration is a measure of the bond’s price sensitivity to changes in interest rates.
Is effective duration lower than modified duration?
Effective duration differs from modified duration because the latter measures the yield duration – the volatility of the interest rates in terms of the bond’s yield to maturity – while effective duration measures the curve duration, which calculates the interest rate volatility using the yield curve as a benchmark.
What are the three types of duration?
Duration – Definition, Top 3 Types (Macaulay, Modified, Effective Duration)
Is effective duration the same as option adjusted duration?
An alternative measure of duration – known as “option-adjusted duration” or “effective duration” – takes into account the effect of the call option on the expected life of a bond.
What is weighted average life MBS?
The weighted average life (WAL) is the average length of time that each dollar of unpaid principal on a loan, a mortgage, or an amortizing bond remains outstanding.
Is weighted average life the same as weighted average maturity?
So while the ‘Term” or maturity of two cases might be the same, their Weighted Average Life, or the average amount of time each dollar of principal is invested, may be widely different. The WAL, therefore, is a more accurate way of comparing.
How do you calculate average duration?
It is calculated by dividing total time spent across sessions by the total number of sessions.
What is the difference between effective duration and effective maturity?
Duration and maturity are key concepts that apply to bond investments. Effective duration and average maturity apply if you have a portfolio consisting of several bonds. While maturity refers to when a bond expires, or matures, duration is a measure of the bond’s price sensitivity to changes in interest rates.
What is the difference between modified and effective duration?
What is the difference between duration and modified duration?
Duration or Macaulay Duration refers to measurement of weighted average time before having the cash flow, while Modified Duration is more on the percentage change in price in terms of yields.
What is the difference between effective and modified duration?
What is the weighted average duration of assets?
Weighted Average Duration means a measure of the average length of time to maturity of all of the underlying instruments in the portfolio weighted to reflect the relative holdings in each instrument, where the maturity of a floating rate instrument is the time remaining until the next interest reset to the money market …
How is weighted average life calculated?
What is the average duration?
Average Duration. Duration is a time measure of a bond’s interest-rate sensitivity, based on the weighted average of the time periods over which a bond’s cash flows accrue to the bondholder. Time periods are weighted by multiplying by the present value of its cash flow divided by the bond’s price.
When is a weighted average less than a normal average?
They’re essential in statistical analysis, finance, and classrooms, to name a few. The normal average of a data set becomes less useful when certain numbers are occurring more frequently than others. In these cases, calculating a weighted average gives users a more accurate look at the data.
Should I use weighted average?
The weighted average is one of those things that is used to more accurately portray a sample in relation to a population. There are some particulars when you want to use it, like outliers and variance, but overall it is a pretty well-rounded way to account for differences in the data.
How do you calculate average life?
– Year 1 = 1 x $1,000 = $1,000 – Year 2 = 2 x $10,000 = $20,000 – Year 3 = 3 x $4,000 = $12,000 – Year 4 = 4 x $6,000 = $24,000 – Year 5 = 5 x $2,000 = $10,000
How to calculate average life?
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