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Similarities in both values and definitions of Macaulay duration versus Weighted Average Life can lead to confusing the purpose and calculation of the two. [12] For example, a 5-year fixed-rate interest-only bond would have a Weighted Average Life of 5, and a Macaulay duration that should be very close. Mortgages behave similarly.
Frederick Robertson Macaulay (August 12, 1882 – March 1970) was a Canadian economist of the Institutionalist School. He is known for introducing the concept of bond duration . [ 1 ] Macaulay's contributions also include a mammoth empirical study of the time series behavior of interest rates published in 1938 and a study of short selling on ...
Suppose a new 5 year FRN pays a coupon of 3 months SOFR +0.20%, and is issued at par (100.00). If the perception of the credit-worthiness of the issuer goes down, investors will demand a higher interest rate, say SOFR +0.25%. If a trade is agreed, the price is calculated. In this example, SOFR +0.25% would be roughly equivalent to a price of 99.75.
However, as Dr. Frank Fabozzi points out, the Macaulay duration metric and immunization theory are based on the assumption that any shifts in the yield curve during the planning period will be parallel, i.e. equal at each point in the term structure of interest rates. But when a non-parallel shift in the yield curve occurs, there is a risk that ...
Formally, the duration gap is the difference between the duration - i.e. the average maturity - of assets and liabilities held by a financial entity. [3] A related approach is to see the "duration gap" as the difference in the price sensitivity of interest-yielding assets and the price sensitivity of liabilities (of the organization) to a change in market interest rates (yields).
The duration of an equity is a noisy analogue of the Macaulay duration of a bond, due to the variability and unpredictability of dividend payments. The duration of a stock or the stock market is implied rather than deterministic. Duration of the U.S. stock market as a whole, and most individual stocks within it, is many years to a few decades.
Duration may refer to: The amount of time elapsed between two events Duration (finance) – the weighted average time until the various cash flows from a security, such as a bond , are received
Francis Sowerby Macaulay FRS [1] (11 February 1862, Witney – 9 February 1937, Cambridge) was an English mathematician who made significant contributions to algebraic geometry. [2] He is known for his 1916 book The Algebraic Theory of Modular Systems (an old term for ideals ), which greatly influenced the later course of commutative algebra .