WALs of Classes of Loans
The WAL of a bullet loan (non-amortizing) is exactly the tenor, as the principal is repaid precisely at maturity.
For a given tenor, WAL increases with increasing coupon, as the principal payments become increasingly back-loaded. For a coupon of 0%, where the principal amortizes linearly, the WAL is exactly half the tenor plus half a period, because principal is repaid in arrears (at the end of the period). So for a 30 year 0% loan, paying monthly, the WAL is 15 1/24 years.
In loans that allow prepayment, the WAL cannot be computed from the amortization schedule: one must also make an assumption about the prepayment behavior, and the quoted WAL will be an estimate, which may be called simulated average life and based on an option-adjusted spread (OAS) model. This is particularly used in mortgage-backed securities.
Read more about this topic: Weighted-average Life
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