Weighted Average Rating Factor (WARF)
The weighted average rating factor (WARF) is a measure that is used by credit rating companies to indicate the credit quality of a portfolio. To calculate the weighted average rating factor on a CDO, the rating agencies must first determine a credit rating for each instrument underlying the CDO. The weighted average rating factor (WARF) is a measure that is used by credit rating companies to indicate the credit quality of a portfolio. This letter rating corresponds to a numerical rating factor, which in turn correspond to the 10-year probability of default. In the Fitch Ratings taxonomy, for example, this rating can range from extremely high credit quality (AAA) to low quality (CCC) to default (D).
What Is Weighted Average Rating Factor (WARF)
The weighted average rating factor (WARF) is a measure that is used by credit rating companies to indicate the credit quality of a portfolio. This measure aggregates the credit ratings of the portfolio's holdings into a single rating. WARFs are most often calculated for collateralized debt obligations (CDOs).
Understanding the Weighted Average Rating Factor (WARF)
To calculate the weighted average rating factor on a CDO, the rating agencies must first determine a credit rating for each instrument underlying the CDO. In the Fitch Ratings taxonomy, for example, this rating can range from extremely high credit quality (AAA) to low quality (CCC) to default (D). This letter rating corresponds to a numerical rating factor, which in turn correspond to the 10-year probability of default. The WARF is determined by calculating the weighted average of these numerical factors. To calculate the weighted average, the notional balance of the asset is multiplied by the rating factor and then these values are summed. This sum is then divided by the total notional balance of the portfolio.
Related terms:
Asset-Backed Security (ABS)
An asset-backed security (ABS) is a debt security collateralized by a pool of assets. read more
Collateralized Debt Obligation (CDO)
A collateralized debt obligation (CDO) is a complex financial product backed by a pool of loans and other assets and sold to institutional investors. read more
Corporate Credit Rating
A corporate credit rating is an opinion of an independent agency regarding the likelihood that a corporation will fully meet its financial obligations. read more
Credit Rating
A credit rating is an assessment of the creditworthiness of a borrower—in general terms or with respect to a particular debt or financial obligation. read more
Fitch Ratings
Fitch is an international credit rating agency based out of New York City and London that is often used as an investment guide to stocks promising a solid return. read more
Rating
A rating is an assessment tool assigned by an analyst or rating agency to a stock or bond indicating its potential for opportunity or safety. read more
Weighted Average Credit Rating (WACR)
The weighted-average credit rating is the weighted average rating of all the bonds in a bond fund. read more