what is weighted average life wal 
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 calculating wal shows an investor an analyst or a portfolio manager how many years it will take to receive roughly half of the amount of the outstanding principal the formula is useful in measuring the credit risk associated with fixed income securities understanding weighted average life wal the time weightings used in weighted average life calculations are based on payments to the principal in many loans such as mortgages each payment consists of payments to principal and payments to interest in wal only the principal payments are considered and these payments tend to get larger over time with early payments of a mortgage going mostly to interest while payments made towards the end of the loan are applied mostly to the principal balance of the loan time periods with higher dollar amounts have more weight in wal for example if the majority of the repayment to principal is in 10 years the weighted average life will be closer to 10 years weighted average life examplethere are four steps involved in calculating an amortizing bond s wal assume a bond makes one payment per year over the next five years the bond s payments are 1 000 2 000 4 000 6 000 and 10 000 therefore the total value of the unweighted payments before the wal computation is 23 000 the first step of the calculation is to take each of these payments and multiply them by the number of years until the payment occurs in this example these values would be the second step in the calculation is to add these weighted amounts together in this example the total weighted payments equal 91 000 step three is to add up the bond s total unweighted payments in this example the total is 23 000 the final step is to take the total weighted payments and divide this value by the total unweighted payments to get the wal weighted average life 91 000 23 000 3 96 yearsin this example wal is roughly equal to 4 00 and at the end of four years 13 000 of the 23 000 of principal is paid slightly more than half the largest payment is the final payment so the wal is closer to the total five year term of the bond on the other hand if year two and year five payments were switched the weighted average life would be much lower weighted average life 67 000 23 000 2 91 yearswal gives investors or analysts a rough idea of how quickly the bond in question pays out returns since rational investors want to receive returns earlier if two bonds were compared the investor would select the one with the shorter wal stated differently the most significant credit risk of a loan is the risk of loss of principal and a smaller wal indicates a higher likelihood that the principal will be repaid in full 