 # So what exactly is Weighted average life of a MBS? How is it different from WAM?

There isn’t a very clear definition in the book so I did some research online, it seems that WAL and WAM are 2 completely different concepts. WAM is easy, as the name suggested it is the weighted average maturity of a pool of fixed income debts like mortgages. However, I couldn’t seem to understand what WAL is and what’s the meaning of it.

From Investopedia, it says: “WAL shows how many years it will take to receive roughly half of the amount of the outstanding principal.”

However, from the CFA textbook, it says: “WAL gives the investor an indication of how long investors can expect to hold the MBS before it is paid off”

I think these two definitions are contradicted to each other…

Here’s an example from FINANCE TRAIN:

Assume a \$10,000 mortgage with a maturity of 30 years and coupon of 6%. The monthly payments will be \$59.96

For this loan, the WAL will be calculated as follows:

WAL = (59.96 * 360 – 10,000)/(10,000*0.06) = 19.31

What’s the logic behind this calculation? What do this 19.31 years mean? If there is a prepayment rate (Like SMM or CPR), How could we incorporate the prepayment rate into the WAL calculation?

Thank you so much guys!