See: WACC.
Weighted Average Life: the actuarial table that life insurance companies use when they sell products to sumo wrestlers.
Also, it's a stat used in determining how long it takes to pay back the principal of a loan.
You loan a friend $50,000 at 5% interest, with a five-year term. They are going to pay you back in monthly installments. So 5% a year means $2,500 in annual interest, times five years, or $12,500 in total interest. Plus the $50,000 principal. All paid back in 60 installments (five years times 12 monthly payments each year).
Your friend will be sending you $1,041.67 a month for the next five years to pay back the loan. But some of the $50,000 principal will come back to you almost immediately. Part of that first $1,000 payment will include a repayment of a portion of the principal. Other dollars you won't see again until the 60th payment five years from now.
What's the average length of time your money will be away from you? That's what weighted average life measures.
The measure comes up most in comparing a certain kind of bond called "amortizing bonds." These debt instruments provide periodic repayments of principal over the course of the bond's life. These payments can be irregular, meaning they aren't the same over the course of a bond's life.
You buy a bond that has a $10,000 face value. It has a five-year maturity with the following payment schedule for its principal:
Year 1: $1,000
Year 2: $2,000
Year 3: $2,000
Year 4: $3,000
Year 5: $2,000
To figure out the WAL, you multiply the total for each year by the number of years that money will be outstanding. So for year one, you multiply $1,000 by one. It's $1,000 that will be repaid in one year.
For year two, you multiply $2,000 by two...$2,000 repaid in two years. That equals 4,000 dollar-years. And so on.
The products of the various years are added together. You get an equation like this:
($1,000 x 1) + ($2,000 x 2) + ($2,000 x 3) + ($3,000 x 4) + ($2,000 x 5) = 33,000 dollar-years.
Now that dollar-year figure gets divided by the face value of the bond...in this case, $10,000. So $33,000 dollar-years divided by $10,000. You get a WAL for this bond of 3.3 years.
Another way to think about it: you'll be half repaid in 3.3 years. At that point, you should have $5,000 back of the original $10,000 you loaned out as the bond's face value.
Related or Semi-related Video
Finance: What are Time-Weighted Rate Of ...1 Views
Finance allah shmoop what are time and risk waited rates
of return a dollar today is worth more than a
dollar tomorrow Like that's the central prayer of the financial
force Here's the gist You've double your money in an
investment Is that good Bad ugly mon We need a
whole lot more information here Tto answer Did you buy
thirty eight million and two dollars worth of lottery tickets
and that last two dollar ticket got you seventy six
million in winnings Was that like a good investment Or
how about this You took thirty six years to double
your money Was that good I answer to both No
not at all The lottery ticket example is a risk
waited return The lottery famously takes advantage of ignorant people
spending their hard earned money on tickets representing dreams but
which have horrible odds of any kind of decent pay
back But the lottery makes go into a vegas casino
look like actually a good deal so you may win
but it's a bad risk no matter how you look
at it And hey somebody has to pay those teacher
pension bill So why shouldn't it be people who didn't
graduate high school Right Well the time waiting is a
big deal to in a world where the stock market
broadly speaking doubles on its own About every eight nine
ten twelve years Something like that This calculation is done
over very long periods of time and it's held true
for about a century and change in america So if
he took thirty six years to double your money well
it implies you only made two percent a year as
your rate of return Remember that rule of seventy two
thing Yeah that right there Seventy two divided by thirty
six and you get a whopping two percent return Well
in that same period of time the market might have
doubled in four times So the ten grand that double
to be twenty grand in thirty six freakin years under
your watch we'll have you just put it into an
index fund of the s and p five hundred over
that same time period Well it would have doubled once
along the timeline here to be twenty grand then doubled
again here to be forty grand and then doubled again
here to be a tigre rine and then ah forthe
doubling right here after thirty six years maybe one hundred
sixty grand And that's just an index fund Nothing fancy
Not warren buffett Just a basic vanilla index fund that
anyone with two hundred fifty bucks in their pocket can
buy And it's worth noting dividends which often get ignored
in the financial press actually matter a ton when it
comes to the calculation of long term investment results Generally
speaking that continued payment of dividends is a low risk
adventure Very few companies ever cut or fully do away
with their dividends And if they do well it means
a pretty much everything is rotten in denmark so you
can count on dividends The bolster overall returns that historically
dividends have had a wide range of somewhere between two
and seven or eight percent for the mid range of
the s and p five hundred But if you pegged
them around and three ish percent today and changed to
reflect the modern era well then the overall market need
only compounded about five percent To deliver that five plus
three percent and change eight ish percent total returns That
will allow the stock market to double about every nine
years or so right so we're ignoring taxes here but
we're ignoring the use of dividends proceeds to buy more
shares every quarter as well when those dividends air paid
So when you think about time and risk think about
them like they're a kind of financial stone soup which
when mixed together with the right spices of tax hedges
leverage and a bull market well make a really nice
retirement meal and you don't even need your teeth on 00:03:22.773 --> [endTime] a bonus
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