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Duration measures how long it takes, in years, for an investor to be repaid a bond’s price through its total cash flows. Duration can also be used to measure how sensitive the price...
In finance, the duration of a financial asset that consists of fixed cash flows, such as a bond, is the weighted average of the times until those fixed cash flows are received.
In this short guide, you’ll see how to calculate the bond duration. More specifically, you’ll see how to calculate the: Macaulay duration; and; Modified duration; To start, here is the formula that you can use to calculate the Macaulay duration (MacD): (t1*FV)(C) (tn*FV)(C) (tn*FV)
Macaulay Duration is the weighted average time until a bond's cash flows are received. Modified Duration, a derivative of Macaulay Duration, measures the percentage change in a bond's price for a 1% change in interest rates.
It measures the sensitivity of a bond’s price to changes in interest rates by calculating the weighted average time it takes to receive all the interest and principal payments. The longer the duration, the greater the interest sensitivity. Bond prices change with interest rates. When rates go up, bond prices go down.
Effective Duration. The effective duration formula uses the bond's current yield to maturity (YTM), along with two more present values (a slightly higher YTM and a slightly lower yield YTM).
The duration formula is used to determine a bond and a fixed-income portfolio’s sensitivity toward interest rate changes. Typically, when the interest rates of a bond rise, the higher the duration to maturity, the higher the chances of its price falling.
Key Takeaways. What is Bond Duration? Bond duration, in its simplest sense, measures the average time period it will take, in years, for an investor to be repaid the bond’s price by the bond’s total cash flows. In other words, duration is the weighted average life of a bond’s cash flows, taking the time value of money into account.
Duration is a way of measuring the interest rate risk of an individual or portfolio of fixed income securities. Learn the different types of duration.
Duration is a measurement of a bond’s interest rate risk that considers a bond’s maturity, yield, coupon and call features. These many factors are calculated into one number that measures how sensitive a bond’s value may be to interest rate changes. How investors use duration.