Weighted average maturity is a term most commonly applied to mortgage-backed securities, which are a type of derivative investment made up of many individual mortgages. A calculation based on the combined value of all the mortgages in the security and the time to maturity, or time until final payoff, for each mortgage yields the weighted average maturity. The higher the figure resulting from the weighted average maturity calculation, the longer the assets that underly the derivative security have until final payoff.
The calculation of a weighted average maturity of an investment begins with the total value of all the assets that comprise the security. The value of each asset is then divided by the total value of all assets; that result is multiplied by the years remaining to maturity of the individual asset. That step is then repeated for every individual asset in the portfolio. Adding together the results for each asset provides the average weighted maturity of the security.
In mathematical calculations, the term "weight" refers to the relative importance of one number to others. Dividing the value of one individual asset in a portfolio by the total value of all assets in a portfolio yields the weight of the individual asset relative to the total portfolio. A weighed average goes one step further by calculating the total relative importance of all assets in a portfolio.
For those evaluating a security, the weighted average maturity does not offer any insight into the quality either of the individual investments that underly the security or the cumulative quality of the assets. The figure does give a one-time account of how long the asset will continue to generate income if the underlying assets remain healthy. Reviewing the weighed average maturity over time can give an even clearer picture of the security’s long-term time to payoff, again, assuming the health of the assets that underly it.
The term weighted average maturity is also applied to a calculation used to evaluate bonds. Called the Macaulay duration and named for economist Frederick Macaulay, this calculation is designed to help account for the risk of changing interest rates on the value of a bond. Macaulay determined that unweighted averages were not helpful in attempting to predict such risks. His bond duration discounts the bond’s cash flow with its yield to maturity, multiplies it by the time to cash flow and divides that by the bond’s price.