# What Is Weighted Average Life (WAL) and How to Calculate It

![Weighted Average Life (WAL): The average length of time that each dollar of unpaid principal on a loan, a mortgage, or an amortizing bond remains outstanding.](https://www.investopedia.com/thmb/8RXWgCH9mio_yiSbFtJ7loMGBtI=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/weightedaveragelife.asp-final-ec0519049cb84754844f37b0fb7ef5e9.png)

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## What Is Weighted Average Life (WAL)?

The weighted average life (WAL) represents the average time each dollar of unpaid principal on loans, mortgages, or amortizing bonds remains unpaid. This calculation helps investors, analysts, and portfolio managers assess credit risk by estimating how long it will take to recover half of the outstanding principal. Unlike simple interest or amortization, WAL focuses on principal payments, making it an essential tool for fixed-income securities analysis.  

### Key Takeaways

*   Weighted average life (WAL) measures the average time each dollar of unpaid principal on a loan or bond remains outstanding.  
    
*   WAL calculations consider only payments to principal, not interest, highlighting the timing of these payments.  
    
*   A bond with a shorter WAL is generally preferred due to its lower credit risk, suggesting quicker principal return.  
    
*   WAL provides insight into the time it takes for approximately half of a bond's principal to be repaid.  
    
*   Calculating WAL involves a weighted sum of payments against the number of payment years, offering a measure of credit risk for fixed-income securities.

## How Weighted Average Life (WAL) Impacts Loan Repayment

The time weightings used in weighted average life calculations are based on payments to the [principal](https://www.investopedia.com/terms/p/principal.asp). In many loans, such as mortgages, each payment consists of payments to principal and payments to [interest](https://www.investopedia.com/terms/m/mortgageinterest.asp). 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](https://www.investopedia.com/terms/r/repayment.asp) to principal is in 10 years, the weighted [average life](https://www.investopedia.com/terms/a/averagelife.asp) will be closer to 10 years.

## Example Calculation of Weighted Average Life

To calculate an amortizing bond's WAL, follow four steps. Assume the bond makes one yearly payment. In five years, the payments are $1,000, $2,000, $4,000, $6,000, and $10,000. So, the total unweighted payment value is $23,000 before calculating WAL.

First, multiply each payment by the number of years until it occurs. For this example, the calculations are:

*   Year 1 = 1 x $1,000 = $1,000
*   Year 2 = 2 x $2,000 = $4,000
*   Year 3 = 3 x $4,000 = $12,000
*   Year 4 = 4 x $6,000 = $24,000
*   Year 5 = 5 x $10,000 = $50,000

Next, add these weighted amounts, totaling $91,000. Then, sum the bond's total unweighted payments, which is $23,000. Finally, divide the total weighted payments by total unweighted payments to find the WAL:

Weighted average life = $91,000 / $23,000 = 3.96 years

In 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:

*   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

Weighted average life = $67,000 / $23,000 = 2.91 years

WAL 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](https://www.investopedia.com/terms/c/creditrisk.asp) 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.

## The Bottom Line

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