MBS : Average life vs WAM

[xsw05]

What are the difference btw these two, Average life and weighted average maturity in MBS?
which one will have higher interest rate risk? MBS with longer Average life or MBS with longer WAM?

 

[AudreyMwala]

Looks like they are one thing
Average life= projected principle received at time t/12*total principle
Ave, life depends on the prepaymet assumption used i.e. the hiher the prepayment speed the shorter the average life
interest rate risk- longer matuarity higher risk

 

[xsw05]

AudreyMwala Wrote:
——————————————————-
> Looks like they are one thing
>
> Average life= projected principle received at time
> t/12*total principle
>
> Ave, life depends on the prepaymet assumption used
> i.e. the hiher the prepayment speed the shorter
> the average life
>
> interest rate risk- longer matuarity higher risk
In CFAI book volume 6, pg 387, Q44. The answer is referring to longer average life to have higher interest risk!!!. anyone here can clarify!!!

 

[swaptiongamma]

Yea, you dont consider WAM of the pool. Average Life is the indicator of the Interest rate (kind of like the duration thingie)