What it means
Weighted average coupon is a standard way to describe the interest rate on a mortgage-backed security, which is a bond whose payments come from a pool of home loans. Every loan in the pool has its own rate, and the WAC compresses them into one number.
The weighting matters because a simple average would treat a tiny loan the same as an enormous one. Weighting by outstanding balance means the figure reflects where the money actually sits.
Investors and risk teams watch WAC because it signals the income the pool generates and how sensitive it is to refinancing. A pool whose WAC is well above current market rates tends to prepay faster, since borrowers have an incentive to refinance, and that shortens the life of the investment.
The figure changes over time as loans are paid down or repaid early. Reports therefore usually show the current WAC next to the original WAC, so readers can see how the pool has shifted since it was formed.
The same abbreviation has other meanings outside securitisation. In stock accounting it can mean weighted average cost, the average unit cost of inventory weighted by quantity, and in pharmaceutical pricing it means wholesale acquisition cost, a manufacturer's list price to wholesalers.
Always check which meaning is intended before relying on a number. A related measure is the net WAC, which subtracts servicing and guarantee fees from the gross rate to show what is passed through to bondholders.
Securities documents often use the net figure to work out the interest due on the bonds, so the two numbers should never be mixed up.
In practice
Real-world examples.
Example
A lender assembles a pool of car loans with a WAC of 7.2% and sells bonds backed by the pool that pay investors an average of 5.4%. The 1.8 percentage point gap is the cushion that covers servicing costs and early losses. Rating analysts look closely at how large that gap remains as the pool ages, because a shrinking gap leaves less protection for bondholders.
Example
An analyst at an asset manager compares two mortgage pools. One has a WAC of 4.0% and the other 6.5%, while current market mortgage rates have fallen to 5.0%. She expects the 6.5% pool to prepay faster because many of its borrowers can now refinance more cheaply. She therefore values the higher-rate pool using a shorter expected life, which lowers its estimated return.
Example
A hospital finance manager sees "WAC" on a drug supplier price list. It means wholesale acquisition cost, the list price before discounts and rebates, so she budgets using the lower net price negotiated by the purchasing group rather than the list figure. Mixing up the two prices could overstate her annual drug spend by a wide margin.
Formula
Calculation
WAC = sum of (loan balance x loan rate) / sum of loan balances
Suppose a pool holds three loans. Loan A is $400,000 at 6.0%, Loan B is $300,000 at 5.0% and Loan C is $300,000 at 4.0%, so total balances are $1,000,000. The annual interest is 400,000 x 0.06 = $24,000, plus 300,000 x 0.05 = $15,000, plus 300,000 x 0.04 = $12,000, which gives $51,000. WAC = 51,000 / 1,000,000 = 5.1%, compared with a simple average of (6.0 + 5.0 + 4.0) / 3 = 5.0%, so the larger 6.0% loan pulls the weighted figure upwards. If Loan A is later repaid in full, the pool falls to $600,000 with interest of 15,000 + 12,000 = $27,000, and the new WAC is 27,000 / 600,000 = 4.5%, which shows how the figure drops when the highest-rate loan leaves.Case study
Seen in the real world.
Cedar Ridge Funding is an illustrative, fictional specialist lender that packages small business loans into investor bonds. When it first marketed a pool, the offering showed a WAC of 9.4% and a bond coupon of 7.0%, leaving a comfortable gap.
Six months later several of the highest-rate borrowers repaid early, and the pool WAC drifted down to 8.8%. The gap narrowed from 2.4 to 1.8 percentage points, and the finance team had to revise its expected profit from the retained portion of the deal.
The illustrative takeaway is that WAC is a moving figure, and anyone who models cash flows from a pool should refresh it with every monthly report. Cedar Ridge now publishes a one-page update each month showing the current WAC, the original WAC and the remaining gap to the bond coupon.
Watch out
Common mistakes.
- Using a simple average of the loan rates instead of weighting by balance, which overstates the influence of small loans.
- Assuming the WAC stays fixed for the life of the pool when it changes as loans amortise or prepay.
- Treating WAC as the return an investor actually earns, when fees, losses and the price paid for the bonds all change the real yield.
Questions
People also ask.
What is the difference between WAC and WAM?
WAC is the average interest rate of the pool, while WAM is the weighted average maturity, meaning the average time remaining before the loans are repaid.
Is a higher WAC always better for an investor?
Not necessarily, because a high WAC often brings faster prepayments and may reflect riskier borrowers.
Where can I find the WAC of a pool?
It is normally shown in the offering documents and in the monthly servicer or trustee reports for the securities.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%Related