In general how is Average Life is same/different from WAM (weighted Average Maturity)? CFA Curriculum (Volume 5) Page 411, Prob 21 is interesting “… Which MBS would probably be better from asset/liability perspective” any comments please?
Well, here are my thoughts. WAL is a measure of how long it is estimated to take to get your principal back, while WAM is the weighted average legal maturity of your securitized mortgages. WAL is a more useful measure, as it doesn’t assume that you receive all your money back at maturity (and hence incorporates scheduled and unscheduled principal repayments over time). If in doubt, use WAL. I highly doubt you’d have to calculate WAL on the exam, as it’s very time-intensive. It’s also not really a LOC as far as I can tell. As for question 21, S&L portfolios will want shorter-term securities. The first option has a WAM of 310 months, while the second has a WAL of 24 months. While WAM and WAL aren’t the same thing, they are related; all else equal, a longer WAM will result in a longer WAL. You’d need an extremely high PSA to get the WAL for option 1 lower than option 2.
from the answer : ‘The manager of an S&L portfolio is concerned with prepayment risk but more specifically extension risk’ . From where does it follow that the manager is concerned with the extension risk rather than the contraction risk ? Is there something inherent in the S&L business that warrants this fact ? Since this is not my area I am not familiar, and I do not see anything in the question that would indicate such thing. Any thoughts / comments would be appreciated.
if the mbs extends… he gets his money back later…