Weighted Average Remaining Term (WART)
Candlefocus EditorThis is valuable information for many investors and is typically used to assess the impact of various investments on a portfolio’s interest rate and prepayment risk exposures. WART can also be useful for managing and monitoring the liquidity of the portfolio. A portfolio with a low WART exposes the investor to less coupon price risk because of its shorter-term holdings.
When comparing investments, the shorter the WART the better, assuming other factors such as credit risk are still satisfactory. Generally, investments with lower WARTs will experience less price volatility over time because of the shorter durations, although other market factors can also impact price. Lower WART investments may also provide a lower yield than those with a longer WART, all else being equal.
In conclusion, WART is a helpful tool for investors, who can use it to assess the interest rate and prepayment risk, as well as the financial health of their portfolio. It is important to understand that the lower the WART, the lower the price risk. However, it is important to consider other factors such as yield, creditworthiness, and potential returns when making investment decisions.