Credit Risk Management Practice Exam 2025 – Complete All-in-One Guide to Master Your Exam!

The weighted average coupon (WAC) serves as a crucial indicator in securitized structures, particularly those related to mortgage-backed securities or other asset-backed securities. It reflects the average interest rate of the loans or mortgages that underpin the securitized asset, weighted by the outstanding principal balances of those loans.

This measurement provides investors and analysts with insight into the income generated by the securitized products, allowing them to assess potential cash flow and return characteristics. A higher WAC typically indicates a higher cash inflow from interest payments, which can be attractive to investors, especially in a low-interest-rate environment.

Understanding the WAC is essential for evaluating investment performance, pricing, and risk management in the context of the underlying loan performance. The other options provide relevant attributes related to securitized structures but do not specifically define the WAC's role as a simple average of interest rates on loans.