Applications
WAL is a measure that is useful in credit risk analysis on fixed income securities, bearing in mind that the main credit risk of a loan is the risk of loss of principal. The primary reason for this is that, all else equal, a longer-dated bond (i.e. a greater maturity) has greater risk than its shorter-dated counterpart.
WAL should not be used to calculate interest rate risk, as it only includes the principal payments, omitting interest payments. Instead, one should use bond duration, which takes the average of all cash flows.
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