Answer: WAC 3.98%; WAM 286 months

## Explanation **Correct Answer: C** ### Weighted-Average Coupon (WAC) Calculation: WAC is calculated by multiplying each mortgage's interest rate by its weight in the total current pool value: - Mortgage A: 3.60% × (350,000/2,000,000) = 3.60% × 0.175 = 0.63% - Mortgage B: 3.75% × (475,000/2,000,000) = 3.75% × 0.2375 = 0.89% - Mortgage C: 4.12% × (550,000/2,000,000) = 4.12% × 0.275 = 1.13% - Mortgage D: 4.25% × (625,000/2,000,000) = 4.25% × 0.3125 = 1.33% **Total WAC = 0.63% + 0.89% + 1.13% + 1.33% = 3.98%** ### Weighted-Average Maturity (WAM) Calculation: WAM is calculated by multiplying each mortgage's current maturity by its weight in the total current pool value: - Mortgage A: 340 × (350,000/2,000,000) = 340 × 0.175 = 59.5 months - Mortgage B: 310 × (475,000/2,000,000) = 310 × 0.2375 = 73.625 months - Mortgage C: 270 × (550,000/2,000,000) = 270 × 0.275 = 74.25 months - Mortgage D: 250 × (625,000/2,000,000) = 250 × 0.3125 = 78.125 months **Total WAM = 59.5 + 73.625 + 74.25 + 78.125 = 285.5 months ≈ 286 months** ### Why Other Options are Incorrect: - **A**: Uses simple average interest rate (3.93%) instead of weighted average - **B**: Uses simple average interest rate (3.93%) and simple average maturity (292.5 months) instead of weighted averages - **D**: Uses weighted average coupon correctly but incorrect weighted average maturity calculation **Key Takeaway**: WAC and WAM must be calculated using weighted averages based on each mortgage's proportion of the total current pool value, not simple arithmetic averages.

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